Unlike other sectors, insurance requires a longer gestation period. Further, the business is highly cyclical, leading to long periods of losses followed by one quarter of profit.
Private equity (PE) firms may have received a go-ahead to become promoters of insurance companies. But the regulator wants to ensure that the PE firms are serious about the business and are ready to commit for at least 5-7 years.
"The idea is that there should be no short-term disruptions and the PEs should be able to demonstrate that the firms have a long-term view about the company and are not in to make a quick buck," said an official.
For all the new deals that involve PEs, the regulator wants to gauge how committed the firm is and what is their exact objective behind the stake acquisition. All approvals will be subject to this criteria.
IRDAI has mandated that PEs will have to stay invested for a minimum of five years to qualify to become insurance company promoters. Further, PEs also have to set up a special purpose vehicle (SPV) for such investments in the insurance sector.
Insurance penetration as a percentage of India’s GDP is at 3.69 percent while the world average is 6.1 percent. This gives the opportunity for growth for the sector and this has piqued the interest of PE players.
Recently, private equity investor True North said it will buy Max India's 51 percent stake in Max Bupa Health Insurance for Rs 511 crore. The transaction values Max Bupa at Rs 1,001 crore, and is expected to be completed in FY20.
Among other firms, PEs are also in race to acquire stake in DHFL Life Insurance. A consortium led by WestBridge is in the final stages of acquiring Star Health Insurance.
Unlike other sectors, insurance requires a longer gestation period. Further, the business is highly cyclical, leading to long periods of losses followed by one quarter of profit.
The idea of the regulator is to have more stability in the system and prevent inflow and outflow of money from the industry on an abrupt basis, leading to momentary disruptions
Once IRDAI has a new chairman, further clarity is expected to emerge around the regulations allowing PEs to invest as promoters in insurance companies.
The minimum shareholding by promoters / promoter group shall at all times be maintained at 50 percent of the paid up equity capital of the insurer.
PE firms typically have a shorter life-cycle of investments and these companies cash out of investee firms as soon as they see a deterioration in the business quality.
