Why insurance and bank stocks are rallying today

The new IRDA norms may result in value being unlocked for these companies.

Rajanya Bose December 02, 2011 14:23:21 IST
Why insurance and bank stocks are rallying today

The Insurance Regulatory and Development Authority (IRDA) on Thursday notified guidelines for life insurers to raise capital via primary markets, that is through an initial public offering (IPO) and subsequent fund raising from the equity market.

The insurance companies need to complete 10 years of operations before they can go ahead with an IPO. The second point is that their total embedded value (present value of future profits plus adjusted net asset value), which will guarantee future income flows, must be twice the size of their paid up capital. Third, they all need to queue up before IRDA to get approval before getting the Sebi nod for the IPO.

Why insurance and bank stocks are rallying today

The insurance companies need to complete 10 years of operations before they can go ahead with an IPO. DavidHilowitz/Flickr

In terms of the condition of completion of 10 years, there are three insurance companies that qualify: ICICI Prudential Life, HDFC Standard Life and SBI Life. For the embedded value to exceed paid up capital, the direct tax code that may come into play will cause trouble for the insurers, says a Mint report. It quotes Amitabh Chaudhary, chief executive officer of HDFC Standard Life Insurance as saying, "If the direct taxes code (DTC) is continued with, the EV will erode by 15-20 percent. We are awaiting clarity on DTC."

In addition, IRDA has also reserved the rights to decide how much stake promoters could dilute, how much foreign investors could invest and what would be the minimum lock-in period for promoters after the issue.

Despite new rules, it may take some time for any of the players to come to the market as the equity markets have not performed well in the past several months. This would not be an ideal time to come looking for money.

But insurance and banking stocks are up due to the new norms and chances of value being unlocked if they get listed. Reliance Capital is up 3.5 percent, State Bank of India is up 2 percent and HDFC Bank is up 1.83 percent. Apollo Hospitals in a tie up with Munich Life Insurance is up 5.45 percent and Max India Life insurance is up 3.7 percent.

Updated Date:

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