IRDAI proposes conditions for investment by private equity funds as promoters in insurance companies.

IRDAI proposes conditions for investment by private equity funds as promoters in insurance companies.

Subject : Economy

Details:

• In 2020, the government had increased the foreign direct investment limit in insurance firms from 49 per cent to 74 per cent under the automatic route.
• IRDAI had given in principle approval to PE funds to invest in insurers in 2017. 
  • Investment by PE funds is expected to bring in more foreign investment to the country.
• A private equity fund will be allowed to invest in any insurer as “promoter” if it has completed 10 years of operation and the funds raised by the PE fund is US $ 500 million or more.
• Investment in the capacity of an investor  in an Indian insurer should be less than 25 per cent of the paid-up equity capital of the insurer and should be restricted to not more than two life, two general, two health and two reinsurers.
  • It should not not below 26 per cent of the paid-up equity capital if the insurer has a track record of solvency ratio above control
• The minimum shareholding of promoters should be maintained at above 50 per cent of the paid-up equity capital of the insurer.

Concept:

Private Equity Fund

• A Private Equity Fund, also known as Private Equity, is equity capital which comprises investors who invest directly in private companies.
• This equity capital is not listed on the stock exchange and usually follows a general investment criteria of investing in varied industries or follows an industry specific criteria.
• Private equity is medium-to-long-term financing offered in exchange for equity ownership in unlisted companies with great growth potential.
• Types of Private Equity
  • Distressed Funding: Money is invested in struggling companies with underperforming business divisions or assets in distressed funding. It is also known as vulture financing. The goal is to turn distressed companies around by making required changes to their management or operations, or by profitably selling their assets.
  • Fund of funds: As the name implies, this sort of investment focuses on other funds, typically mutual funds and hedge funds. They provide a backdoor into such funds for investors who cannot afford the minimum capital requirements.
  • Venture Capital: Venture capital refers to funds invested by individuals or investors to start-ups or small companies aspiring to establish a fresh concept and new entrepreneur.
  • Leveraged Buyouts: This is the most common type of private equity investing, and it entails buying a company outright with the goal of strengthening its commercial and financial health before disposing it for a profit to an interested party or launching an initial public offering (IPO).
  • Real Estate Private Equity: Commercial real estate and real estate investment trusts are two common areas where money is allocated. When compared to other types of private equity fundraising, real estate funds require a greater minimum investment amount. In this sort of funding, investor funds are locked up for several years at a time.

The Insurance Regulatory and Development Authority of India (IRDAI)

• It  is an autonomous and statutory body.
  • It was established by an act of parliament, specifying the composition of the Authority under section 4 of the IRDAI Act of 1999.
• It is responsible for managing and regulating the insurance and reinsurance industry in India.
• The Authority is a ten-member body, specified in section 4 of the IRDAI Act of 1999, consisting of:
  • a Chairman;
  • five whole-time members;
  • four part-time members;
    • All of the appointments are done by the Government of India.