The Hindu : Companies may be allowed to invest in derivatives, swaps

Online edition of India's National Newspaper
Saturday, Sep 07, 2002

Business

Business

Companies may be allowed to invest in derivatives, swaps

NEW DELHI SEPT. 6. The Insurance Regulatory and Development Authority today said it will amend the investment norms to allow insurers to invest in derivatives and swap instruments to hedge risks in a falling interest rate regime.

"We are considering derivatives and swaps as part of investments by insurance companies. Perhaps in a month or two, we might amend Investment Rules,'' the IRDA Chairman, N. Rangachary, said at a conference of IIFT here.

The move comes in view of the falling interest rate regime with insurance companies offering guaranteed return schemes for a span of over ten years despite the facts that there was dearth of long-term instruments.

At present, life insurers are required to invest a minimum 50 per cent in Central and State government papers, 15 per cent in infrastructure and social sector and the remaining 15 per cent in other instruments including equities.

General insures have to invest 50 per cent in government papers, 10 per cent in infrastructure and social sector, 5 per cent in housing and remaining in equity.

Mr. Rangachary declined to elaborate whether derivatives would be part of equity investments or not.

He, however, allayed fears that despite yields on various instruments were falling, the guaranteed return would be ensured to policyholders as the funds are immediately invested in appropriate instruments.

"If there is a situation when the yields are falling and the guaranteed return scheme is unsustainable, then rates of return will have to be reduced also,'' he said citing four rate cuts by Life Insurance Corporation in its single-premium `Bima Nivesh' policy.

The IRDA chief said each insurance company had to undertake acturial valuation of their assets and liabilities every year to ensure a 150 per cent `solvency margin,' instead of the earlier practice in every three years.

Dismissing the chances of asset-liability mismatches in insurance companies, he said every insurer had to set up an `investment committee' which would inform the regulator about any major investment decision.

Moreover, the IRDA had powers to remove the CEOs of a company if it arrived at a conclusion that he was not acting "in the best interest of the company and industry,'' he said.

On other reform measures, Mr. Rangachary said there was no immediate plan to hike foreign investment limit from 26 per cent or reducing the minimum Rs. 100 crore capital limit.

"Even with 26 per cent stake, a foreign partner can exercise management control as they will have powers to block any special resolution of a company,'' he said.

Although the N K Singh Committee on FDI has recommended hiking foreign equity cap to 49 per cent, Mr. Rangachary said the IRDA would require the permission of Parliament to do so.

"What is required is more capital inflow. It will come at the pace Indian promoters infuse capital in the joint ventures as they hold 74 per cent. Fortunately, no Indian company has failed to bring in the required capital,'' he said.

The IRDA was in the process of drawing up the final norms for brokers and agents and the regulator would start granting them licences in November, Mr. Rangachary said, adding the foreign equity cap would remain at 26 per cent for broker firms as it was the case with insurance companies.''

He said banks would be allowed to sell products of only one insurance company if they act as a corporate agent. — PTI

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