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Event Note Sebi Clears Ipo Norms For Insurers


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Event Note Sebi Clears Ipo Norms For Insurers

  1. 1. Event Note: Sebi clears IPO norms for insurers, however final guidelines yet to be issued Event: Capital market regulator, Securities and Exchange Board of India (Sebi) on 25th October’10 has given green signal to the recommendations regarding disclosure norms and accounting policies prescribed by Insurance Regulatory and Development Authority (IRDA). This is one of the 3 phases prescribed by IRDA for IPO of insurance companies in India. IRDA had earlier submitted its report on draft IPO guidelines top p g Sebi, seeking the market regulator’s recommendations. The final IPO guidelines will be issued by IRDA after taking Sebi’s recommendations into consideration. As mentioned earlier by IRDA, the IPO route would be in three phases – Finalization of Red Herring Prospectus (RHP) which is worked upon along with the Security Exchange Board of India (SEBI), Disclosure Norms (cleared by SEBI) and Valuation of Insurance Companies. Main Issues at hand:  Tenure of business operation shouldn’t be less than 10 years.  3 years of profit track record.  Foreign Direct Investment(FDI) cap at 26 per cent. Impact of issues:Impact of issues: Many companies want the norms to be relaxed so that this capital intensive sector can tap primary market to meet fund requirements. Several private sector insurers, including Reliance Life and HDFC Standard Life, have already shown interest in tapping the capital market. Though HDFC Standard Life has completed 10 years of operations, Reliance Life does not meet the 1st criteria. Contemplation of reduction in operational time by IRDA from 10-years to 7-years of operations will enable 12 privatep y y y p p insurers to tap the market. Secondly, the present IPO guidelines of SEBI requires a three years track record of making profit for a company to float a public issue. However, most of the insurance companies are yet to reach the break-even point. Thirdly, most of the 22 private life insurers have foreign partners. With FDI cap at 26%, they will find it tough to attract more sticky money from their foreign partners. Our View: Insurance as a sector in India lags behind most of the developing and developed market as far as its contribution to social security and contribution to GDPdeveloped market as far as its contribution to social security and contribution to GDP are concerned. We believe the above mentioned issues are very sensitive to the private insurance companies which is already reeling under financial pressure. Final guidelines are yet to be issued, but looking at the recent developments we may see flurry of activities in months to come. As such, we may see some price appreciation in Holding companies stocks like HDFC Ltd, SBI, ICICI Bank ,Reliance Capital, BAJAJ Finserv. We believe Max India may be the better of the lot as it is the only listed player with insurance as their core business. Once the IPO’s of insurance companies begin to roll Microsec Research26th October’ 2010 p g out, Max India may give good returns. Analyst – Abhisek Sasmal 033-3051-2100 Microsec Research reports are also available on Bloomberg <MCLI>
  2. 2. Microsec ResearchMicrosec Research Source: IRDA, Microsec Research 26th October’ 2010
  3. 3. Appendix Insurance penetration%Insurance Density (USD) India ranks amongst the lowest (premiums to GDP)Insurance density (per capita premium) – India lags behind 12.8 9.9 7.6 6.2 6.3 4.4 4.1 4 6 8 10 12 145582 2930 2870 2792 2549 2038 1901 2000 3000 4000 5000 6000 3 1.4 2.2 0 2 41347 115 72 41 0 1000 S IRDA Mi R h 104.0% 84 0% 1 1.2 350000 400000 450000 500000 Private Insurers reeling under pressure Source: IRDA, Microsec Research 79.0% 84.0% 13.0% 0.2 0.4 0.6 0.8 50000 100000 150000 200000 250000 300000 350000 6.0% 13.0% 5.0% 7.0% 00 50000 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E Insurance Premiums (INR Mn) Growth% (RHS) Source: IRDA, Microsec Research Microsec ResearchMicrosec Research26th October’ 2010
  4. 4. Kolkata Investment Banking dAzimganj House, 2nd Floor 7, Camac Street, Kolkata – 700 017, India Tel: 91 33 2282 9330, Fax: 91 33 2282 9335 Brokerage and Wealth Management Shivam Chambers, 1st Floor 53 Syed Amir Ali Avenue Kolkata – 700 019 India53, Syed Amir Ali Avenue, Kolkata 700 019, India Tel: 91 33 3051 2000, Fax: 91 33 3051 2020 Mumbai 74 A, Mittal Tower, 7th Floor 210, Nariman Point, Mumbai – 400 021, India Tel: 91 22 2285 5544, Fax: 91 22 2285 5548 Email: Disclaimer This document is prepared by the research team of Microsec Capital Ltd. (hereinafter referred as “MCL”) circulated for purely information purpose to the authorized recipient and should not be replicated or quoted or circulated to any person in any form. This document should not be interpreted as an Investment / taxation/ legal advice. While the information contained in the report has been procured in good faith, from sources considered to be reliable, no statement in the report should be considered to be complete or accurate. Therefore, it should only be relied upon at one’s own risk. MCL is not soliciting any action based on the report. No indication is intended from the report that the transaction undertaken based on the information contained in this report will be profitable or that they will not result in losses. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advisors, as they believe necessary. We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation discussed herein or act as advisor or lender I borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. The same persons may have acted upon the information contained here. Neither the Firm, nor its directors, employees, agents, representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Microsec Research26th October’ 2010