IPO for Indian Life Insurers

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7 July 2011
Arin Ray
In October 2010, the capital market regulator, Securities and Exchange Board of India (SEBI), approved life insurance companies to issue IPOs. India’s insurance regulator, Insurance Regulatory and Development Authority (IRDA), has been planning to come up with guidelines for IPOs of life insurance companies for quite some time; an announcement is expected within the next few months. Current regulations allow only those insurers that have been in business for at least 10 years to go for an IPO. The government is likely to bring this down to five years; however, a final call is yet to be taken. Another such pending proposal is raising the limit of foreign ownership in a joint venture life insurer to 49% (currently capped at 25%). After an IPO, foreign promoters will have to bring down their stake to ensure Indian promoters hold a majority. An insurer opting for a public offering must also offer at least 25% of the shares to the public. Like any other IPO, pricing of an insurance IPO is an area of concern. This is more so for two reasons. First, insurance is a key sector of the economy with a large number of stakeholders; this sector is being allowed to participate in fund-raising from the capital market for the first time. Therefore, overly optimistic valuation may be detrimental to the sector in the long run. Second, in light of the recent events in Japan, it has become critical that all relevant factors affecting the insurance industry are priced in appropriately. The IRDA is likely to spell out appropriate guidelines regarding valuation accordingly. Insurance IPOs are expected to gain traction in the medium to longer term; however, this will also depend on the evolution of the markets and regulatory landscape. The Indian capital market seems to have hit a roadblock in recent months due to high inflation threatening growth prospects. The insurance sector in particular has been adversely affected. New policy sales by private firms took a hit in 2010, and margins are also under pressure. The Direct Tax Code (DTC), scheduled to implementation in 2012, is another cause for concern. This may remove some tax advantages for certain insurance products and raise the tax burden on insurance companies, which is likely to have an adverse impact on sales and profits. Several private sector insurers, including the likes of ICICI Prudential Life, Reliance Life Insurance, SBI Life Insurance, and HDFC Standard Life, are planning to tap the capital market. However, their expected times of offering may differ. While some may go for IPOs in the very near term, others may wait for some time. For example, Reliance, which has been supporting the reduction of the 10-year operations rule to five years, can be expected to raise money from the public in the short term. On the other hand, SBI Life is not in a hurry and wants to wait and watch as the regulations evolve. So even if IPOs do not pick up in the near term, they are likely to become popular in the medium to longer term.

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