Government to Relax Insurance Act

25 August 2011 - Which Way to Pay

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Government to Relax Insurance Act

The government look set to relax the norms for dilution of stake by Indian promoters of insurance companies. This move will facilitate the selling of a 26% stake in Reliance Life to Nippon of Japan.

The proposed order will go some way in removing the ambiguity surrounding Section 6AA of the Insurance Act.

"We will soon issue a circular which will enable insurance firms to dilute promoters' stake though permissible means before 10 years of operations," official sources said.

In 2009, Reliance Life announced plans to go for a public offer bringing to light the ambiguity of Section 6AA because it could not gain regulatory approval on ground of not completing 10 years of existence.

Section 6AA of the Insurance Act, 1938, stipulates that a promoter holding over 26% in an insurance company, including re-insurance, will be required to divest their stake and bring it below this threshold limit in a phased manner "after a period of 10 years from the date of the commencement of the said business by such Indian insurance company or as prescribed by the central government". As such, altering the terms of Section 6AA will give insurance firms the ability to dilute their stake at anytime.

However, it does appear that there is an absence of regulatory hurdles if promoters of life and general companies and re-insurance firms dilute their stake before the 10-year period stipulated in the clause as highlighted by sources at the Law Ministry.

In March this year, Japanese insurance firm Nippon Life Insurance Company agreed to acquire a 26% stake (as per current rules) in Reliance Life Insurance for USD 680 million (about Rs 3,060 core). The deal is still subject to regulatory approval before the foreign entity which is the sixth largest insurer in the world can hold stake in Reliance Insurance. The transaction pegs the total valuation of Reliance Life Insurance at approximately Rs 11,500 crore (USD 2.6 billion).

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