Other forms of capital for insurers capped at 25 percent: IRDAI

The Indian insurance regulator on Friday came out with draft regulations governing the raising of other forms of capital for insurers.

In the draft regulation released on Friday, the Insurance Regulatory and Development Authority of India (IRDAI) proposed to allow insurers to raise financial resources in the form of preference shares, debentures and subordinated debts in addition to equity capital.

The IRDAI proposal envisages to cap the "other forms of capital" for insurers at 25 percent of the total paid up equity capital.

According to the IRDAI, the issuance of such capital is subject to its approval which would be granted subject to (a) It is issued and paid in full in cash; (b) Such preference shares or debentures are subordinated to policyholders, general creditors, and subordinated debt holders of the insurer; (c) It is neither secured nor covered by a guarantee of the issuer or related party or other arrangement that legally enhances the seniority of the claim vis-a-vis the insurer's policyholders and creditors; (d) It is perpetual or the maturity period or redemption period is not less than 15 years and (e) dividends/coupons must be paid out of distributable items.

As per the draft regulations, in case of redeemable preference shares, no other incentives for redemption should be given.

An Indian insurance company may call back the preference shares or subordinated debts so issued only after a minimum period of five years subject to the prior approval of the Authority and on satisfying the various conditions laid down in the regulations.

According to IRDAI, investment in such instruments by foreign investors including foreign institutional investors (FIIs) or foreign portfolio investors (FPIs) shall be subject to FEMA regulations as may be applicable from time to time.

Such capital shall be counted towards calculation of solvency margin subject to conditions.

As per the proposed regulations, an Indian insurance company may call back the preference shares or subordinated debts so issued only after a minimum period of five years subject to the prior approval of IRDAI.