India pushes on with IPOs from life insurance sector
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India pushes on with IPOs from life insurance sector


India is trying to get its life insurers out from between a rock and a hard place by pushing ahead with new legislation to ease the way for their IPOs. The move has been a long time coming, but any marquee public offerings from the country’s life insurance firms are still at least a year away, writes John Loh.

On September 9, the Insurance Regulatory and Development Authority of India (IRDA) issued a set of proposed guidelines that build on rules first released in 2011. Those rules were meant to push life insurance companies operating in the country to raise capital.

But the regulations yielded zero results, with none of India’s 24 life insurers taking up the offer to list. This was partly because market conditions were not conducive as the benchmark indices had fallen nearly 20% around the time the rules were announced in December 2011.   

Structural issues were also a huge barrier. The earlier regulations called for IPO candidates to have completed 10 years in operation, along with an embedded value – an estimate of future values based on present assets and liabilities and future income – of 2x equity capital.

Adding to their woes was the problem of foreign ownership. Many life insurance firms were formed via joint ventures with foreign providers, such as Prudential or Standard Life, but their participation was capped at 26%. 


The new regulations will aim to ease those restrictions. 

“The proposal is a good development,” said Biswajit Chatterjee, a partner with law firm Squire Patton Boggs in Singapore. “They have done away with the 10-year operating track record and 2x embedded value.”

Until now the foreign joint venture partners had been reluctant to list because their holdings would be diluted under an IPO. Foreign investors would also have been effectively shut out of these deals — an outcome that would have depressed valuations.

But in March, the government raised the foreign ownership cap for insurance firms from 26% to 49% — removing a major roadblock for potential floats. 

After a four-year lull, it seems like things are finally picking up. The chairman of HDFC Standard Life Insurance Co, India’s second biggest privately owned life insurer, is understood to have told shareholders in July that an IPO was about a year away.

That would be a landmark transaction, and the first Indian life insurer to be listed since the state allowed private companies to get into the industry in 2000.

Red herring

Even in 2011, when IRDA first announced the listing guidelines, names like HDFC Standard Life, ICICI Prudential Life Insurance Co and SBI Life Insurance Co — three of the biggest in India by assets under management — were bandied about as potential IPO hopefuls. None have come to the market.

Bankers in India say it is not known how much the three could raise should they decide to float, but volumes would be substantial.

IRDA’s proposed changes to legislation, now under consultation, will make insurers more transparent and improve the health of the financial system, said Manan Lahoty, a partner at law firm Luthra & Luthra. “IRDA also wants the public to be able to share in the returns of the life insurance companies,” he said.

Yet the process will be far from smooth sailing. One clause in the draft rules suggests that the IRDA has the power to push a life insurance firm to list if the circumstance warrants so. And that firm will have one year to carry out a listing if it is asked to do so by IRDA.

“On what basis will IRDA make that determination? It seems strange that the regulator can force an IPO,” said Chatterjee. “They are likely to get feedback from market participants on that clause.”

But another market observer reckoned that IRDA wanted to give itself such powers because it was concerned about capital levels and wanted to ensure that insurers had access to capital, while preventing any event of default to policyholders.

No clarity

Another challenge comes from the profitability of some of the businesses. Aside from the biggest players, market watchers say many of the smaller insurance companies are cash strapped.

“Some of the latecomers to the industry are struggling financially as they haven’t been through a full underwriting cycle or had the time to gain market share,” added Chatterjee. “It’s a tall order to be hugely profitable in the first few years of operations in this industry.”

And while the government has loosed restrictions on foreign ownership, the lack of clarity continues to be a hurdle. On one level, the rules require that ownership and ultimate control of life insurance companies remains in the hands of resident Indians. But if the foreign partner lifts its stake to the new upper limit of 49%, then the partner would want to have joint, rather than minority, control.

The other issue is also how the government will quantify the various tiers of foreign ownership. Most life insurance firms are subsidiaries of banks and also have joint ventures with foreign parties, resulting in two levels of foreign ownership at the parent and subsidiary level.

“The amended rules are helpful in that they will allow a larger pool of life insurers to go for IPOs, but more important is clarity on the foreign investment rules,” said an ECM banker in Mumbai. “That’s why we won’t see any IPOs till the second half of 2016.”

Building steam

Several foreign firms are in advanced stages of negotiations to increase their stakes in the local joint ventures, in a bid to prevent a dilution ahead of IPOs, say bankers.

HDFC Standard Life has approached market participants to pitch for a potential IPO over the past few months, said a second banker in Mumbai. ICICI Life has also begun the process, bu t it has not made as much progress. SBI Life meanwhile has no immediate plans for a listing.

“With no pure play insurers listed in India, it’s possible they will attract a premium once they hit the market,” the banker said. “A few private insurers are keen to list as well. It’s a lucrative industry as India is underpenetrated in terms of insurance coverage.”

Some market watchers also wonder whether Life Insurance Corp (LIC), the state-owned insurance giant, could head down the IPO route. “Since the government is pushing for the divestment of state assets, there is a chance it could be a candidate for an IPO,” added Chatterjee.