Page 46 - Insurance Times January 2023

Foreign entities can now invest in local

insurers' unsecured debt, pref shares

n a major boost to insurance sector, the insurance loan or bond that ranks below other, more senior loans or
I regulator IRDAI has allowed foreign investors, securities with respect to claims on assets or earnings.
including FPIs, to invest in preference shares and
Subordinated debentures are also known as junior securities.
subordinated debt issued by Indian insurers,
In the case of borrower default, creditors who own
expanding their pools of capital to fund their business growth
subordinated debt will not be paid out until after senior
in the world’s fastest growing large economy.
bondholders are paid in full. It is usually larger corporations
The regulator has also now allowed the subordinated debt or other business entities that get into borrowing through
issued by the Indian insurers to be listed in local stock subordinated debt.
exchanges (no overseas listing allowed).
Besides ‘debentures’ which can be counted as subordinated
In a new set of regulations around ‘other forms of capital’ debt, the IRDAI has empowered itself to specify any other
now issued by IRDAI, the regulator has stipulated that the instrument as a subordinated debt.
quantum of investments by foreign investors including FII/
Preference shareholders do not have the right to vote, but
foreign portfolio investors (FPIs) in these two instruments they provide such shareholders the special right to claim
— preference shares and subordinated debt— cannot dividend in the lifetime of a company. Also, they could claim
exceed the sectoral cap (specified under FEMA).
the assets in case of wind up of the company.

Overall Limit Expert Take
IRDAI has stipulated that the total quantum of the Srinath Sridharan, Corporate Advisor, said: “The proposal is
instruments under ‘other forms of capital’ taken together bold in expanding the pool of capital / debt to foreign players.
should be lower (at any point in time) of (i) 50 per cent of It also indicates coming of age of Indian insurance players
the total paid-up equity share capital and securities
with ability to access debt from global sources. Since the
premium of an insurer or (ii) 50 per cent of networth of the subordinated debt will be listed in Indian bourses, it will also
insurer. allow for governance mechanism and liquidity-based market
pricing.“
Also, IRDAI has stipulated that the issue of subordinated debt
would either have to be perpetual, or the maturity/ Not only have foreign investors been allowed to invest in the
redemption period should not be less than ten years for life ‘other forms of capital’ (preference shares and subordinated
insurance companies, general insurance companies and bonds), even domestic insurance companies can now do so in
reinsurance insurance companies. The maturity/redemption such instruments issued by other insurers. The only stipulation
period should not be less than seven years for health is that an insurer cannot invest in the ‘other forms of capital’
insurance companies. of another insurer having a common promoter.
Insurers have not been permitted to issue either preference Indian promoters of insurers can also invest in preference
shares or subordinated debt with “put option”. However, shares or subordinate debt, IRDAI has said.
an insurer may issue instruments with a “call option” subject
The new regulation, however, stipulates that a foreign re-
to certain conditions being met.
insurer’s branch would not be allowed to issue these
instruments. The new IRDAI norms also specifies the
What is Subordinated Debt? minimum reporting and disclosure norms. (Source :
Put simply, subordinated debt (debenture) is an unsecured Businessline)

40 January 2023 The Insurance Times