After IRDA, SEBI opposes raising LIC investment cap

The Securities & Exchange Board of India has strongly disapproved the government move to allow Life Insurance Corporation to own up to 30 per cent in a firm, as it feels this could lead to violation of the SEBI's takeover code.

Its objection comes soon after the Insurance Regulatory & Development Authority, the sector regulator, expressed similar disapproval, calling it ''imprudent'', as reported earlier.

While the Insurance Act limits investments by insurance firms into any company at 10 per cent of the fund or 10 per cent of the stake, whichever is lower, the finance ministry has recently circulated a draft that seeks to increase the investment limit for LIC to 30 per cent of the paid-up capital in a company.

Pegging the investment limit at 30 per cent would lead to insurance companies behaving like venture capital undertakings, which would not be warranted, according to IRDA chairman J Harinarayan.

According to SEBI's merger & acquisition rules, an entity acquiring 25 per cent or more in a firm has to make an open offer to buy an additional 26 per cent from shareholders. This means that if LIC's investment in a firm exceeds 25 per cent, it would have to buy another 26 per cent from non-promoter shareholders.

If the open offer is fully subscribed, the insurer would end up holding as much as 51 per cent, breaching the cap of 30 per cent.