The insurance regulator may allow equity investment even in non-dividend paying companies to be included in the approved investment category subject to some conditions. This would increase the eligible universe of companies they can invest in, boosting allocation to stocks.
Under the existing norms, only investment in listed companies that have paid a minimum 10% dividend for at least two consecutive years immediately preceding can be included in the approved category.
A committee set up by the regulator last year had recommended allowing insurers to invest in equity sans the dividend criterion.
“Industry in various interactions with the regulator has sought further liberalised investment norms,” said an official aware of the developments.
“It is being looked at whether to scrap it (dividend rule) or lower the limit, but any relaxation will be provided with prudent regulations to protect policyholders.”
The Insurance Regulatory Development Authority of India (IRDAI) had relaxed the dividend norm following the pandemic for the year April 1, 2020 to March 31, 2021 when many companies were forced to skip dividends. In August, it notified that the relaxation will continue beyond September 2022.
The regulator allowed investment in equity shares of firms that paid dividends “for at least two years out of three consecutive years immediately preceding” to be categorised as “approved investment”.
Under Regulation 3(5) of IRDAI (Investment) Regulations, 2016 no insurer can invest in “Equity shares of any listed company on which not less than 10% dividends have been paid for at least two consecutive years immediately preceding”.
Life insurers can invest up to 50% of controlled fund in other approved instruments, which besides shares and preference shares includes bonds and other debt instruments. This limit is a higher 70% in unit linked insurance business.
Removing the dividend condition will help more companies tap the public market and get institutional backing, which will make equity markets more efficient and support domestic growth, the above quoted official said.
A senior official from a state-run insurance firm said some companies on a growth trajectory would like to retain the dividend and reinvest the same to generate higher profitability and return on equity for shareholders in the future, making a case for removing the dividend condition.
“Such companies irrespective of their profitability and growth are classified as ‘Other Investment’ because of their non-dividend paying nature,” he said, adding that there is no basis to hold that only high dividend paying companies are good for investment.