Irda releases M&A guidelines for general insurance firms

The Insurance Regulatory and Development Authority (Irda) today released regulatory guidelines for mergers and acquisitions (M&As) for non-life insurance companies.

Insurance companies looking for mergers would now have to take the approval of the relevant high court or tribunal before securing the final nod from the insurance regulator. The solvency margin of the merged entity would also have to meet regulatory requirements.

In February, when the regulator had released the draft guidelines for mergers and acquisitions, general insurance companies had raised concerns on the court approval clause. “Under the current guidelines, Irda would not be able to override the court ruling. Hence, it is not ideal. Being the regulator, it should have complete authority like it has over mergers of life insurance companies,” said a senior official of a general insurance company.

Apart from court approval, insurers would also be required to seek the approval of the Reserve Bank of India (RBI). In case a foreign joint venture partner is involved, the Foreign Investment Promotion Board's approval would also be needed.

The final guidelines address another key issue — that of informing all policyholders about the merger proposal. The regulator has mandated that after securing the final approval for the merger, the insurers would have to publish the merger notice in at least one national newspaper.

The guidelines ensure the protection of policyholders, rationalisation of the branch network, streamlining of products, taxation and valuation issues and projected revenue of the merged entity. Policyholders would continue to enjoy the same terms and conditions as they did under the existing policy, and they would be given an exit option.

Though the guidelines remained largely silent on the valuations, Irda has said if deemed necessary, it might, before granting the final approval, appoint an independent actuary for the valuation of the company. “Like the draft, the guidelines only say Irda could appoint an independent actuary to carry out the valuation of the insurance business of the transacting parties. However, there must be some guidelines for valuing the companies. We made our representations through our council and expect to get some clarity on these issues once the revised guidelines come in,” said an official at a private sector general insurance company.

Currently, there are 21 non-life insurance companies in India and most of these have foreign joint venture partners. The Insurance Act caps foreign direct investment in the sector at 26 per cent.

Last year, it was reported that Reliance General Insurance, the general insurance arm of Reliance Capital, was considering buy a majority stake in its rival, Royal Sundaram. Both the companies had approached Irda and await the insurance regulator's approval. Royal Sundaram Alliance Insurance Company is a joint venture between the Sundaram Group and England-based RSA, which owns 26 per cent stake in the alliance.