The Insurance Regulatory and Development Authority of India (IRDAI) has proposed to allow insurers to issue preference share capital and unsecured debentures/subordinated debt under other forms of capital.
According to the exposure draft issued by IRDAI, the non-convertible preference shares and non-convertible unsecured debentures will have a maturity/redemption period of minimum 10 years for life/general/reinsurers and seven years for standalone health insurers.
The total quantum of the instruments under other forms of capital taken together shall be lower of the following, at any point in time: (i) 50 per cent of the total paid up equity and securities premium account and (ii) 50 per cent of the net worth of the insurer.
The IRDAI said investment in such instruments by foreign investors including Foreign Institutional Investors (FIIs) or foreign portfolio investors (FPIs) shall be subject to the limit specified in the FEMA Act, 1999.
The solvency of the insurer shall remain at least at the control level of solvency.
Insurers shall require prior approval of IRDAI for payment dividend or interest for any financial year if:
a. The solvency is below the minimum control level of solvency;
b. The impact of such accrual or payment would result in the control level of solvency falling below or remaining below the regulatory requirement;
c. Where the impact of accrual or payment of interest results in net loss or increases the net loss.
According to IRDAI, an insurer shall not issue any instrument with a “put option”. However, an insurer may issue the instruments with a “call option” subject to:
i. Call option may be exercised after the instrument has run at least for a period of five completed years.
ii. Insurer may exercise the call option without the prior approval of IRDAI.
The IRDAI said that the non-payment of interest on debentures or the amount at the time of redemption will not be considered as default.