Excessively cautious

The new insurance investment norms may prove too restrictive

Nobody can fault the intent behind the Insurance Regulatory and Development Authority’s (Irda’s) proposed change in investment norms for insurance players. The draft norms seek to restrict corporate-sponsored insurance companies from investing more than five per cent of their funds in group companies. At the heart of the matter is the regulator’s intent to protect the interests of policy-holders. Given that there have been instances where corporate houses collected money from the public and invested in group entities, Irda’s proposal seems fair since it seeks to eliminate the risks emanating from such temptations.

Currently, insurance companies that have corporate houses as their sponsors can invest up to 10 per cent of a fund’s total investible corpus in equity instruments of group companies and 2.5 per cent in debt instruments. Conglomerates with an infrastructure play have an additional 12.5 per cent window, taking the total cap to 25 per cent. Prudential norms also prevent insurance players from investing more than 10 per cent of a fund’s corpus in any one company, which holds true for group entities as well. It appears that the regulator has drawn inspiration from norms governing controlled funds, which comprise a corpus of the promoter in the form of capital. Currently, only five per cent of the corpus of controlled funds can be invested in group companies. Irda has replicated this norm for all the assets managed by such insurers.

The logic is unassailable, but Irda’s proposal also needs to be checked against other regulations that exist, as also market realities. After all, the Securities and Exchange Board of India permits corporate-sponsored asset management companies to invest up to 25 per cent of a scheme’s net assets in group companies and up to 10 per cent of a fund’s assets into any one company. Then, Tata group companies collectively account for 9.8 per cent of the total weight of Sensex and 8.2 per cent of the Nifty 50. So if a given fund of Tata AIG has an investment strategy that seeks to mirror the benchmark indices, it will not be able to do so because of the five per cent cap on group investments. The Aditya Birla group, the promoter of Birla Sun Life Insurance, also has a few blue chips in the listed universe. For instance, Grasim and Hindalco together have a weight of 2.16 per cent on the Nifty, while Aditya Birla Nuvo and Ultratech together have a weight of 5.56 per cent in the CNX Midcap Index. In the same mid-cap index, Tata group companies have a weight of 7.7 per cent. Incidentally, the proposed five per cent cap includes exposure to debt. But whatever these market realities may be, the proposed prudential norms mean that corporate-sponsored insurance companies will have to look for investment opportunities outside group entities, after the five per cent limit has been reached.