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Panel to direct more insurance funds to secondary market

NetScribes/Janaki Krishnan

The High Level Capital Markets Committee, set up jointly by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI), will take up the issue of increasing secondary capital market participation by insurance companies.

SEBI chairman D R Mehta said the current initiative is aimed at increasing the presence of domestic financial institutions in the stock markets. "We have asked the Insurance Regulatory and Development Authority (IRDA) to reduce some of the restrictions on insurance companies with respect to equity investments, so that more funds flow into the share market."

Recently, the IRDA was also inducted into the committee, which is expected to hold its meeting later this month.

While the modalities of the relaxations are yet to be worked out, industry sources said that one option was to delink the investment limit from companies' share capital and peg it to the gross premium income of the companies. A second option is to exclude primary market transactions from the 5 per cent limit. However, Mehta made it clear that the various options had still to be thrashed out.

At present, insurance companies are allowed to invest in shares only up to 5 per cent of the equity capital of a company - including primary and secondary market purchases.

Since insurance companies hold a substantial portion of shares in many corporates through primary market subscriptions, their secondary market transactions are severely limited. As of March-end 2000, General Insurance Corporation's total equity investment portfolio stood at around Rs 20 billion, while Life Insurance Corporation's outstanding equity portfolio was at a similar level.

The reason for bringing in increased participation by domestic FIs is to counter the financial muscle of foreign institutional investors, who are dominating the markets with their well-orchestrated strategies of hammering down the prices of scrips and then buying them at low levels.

"The volatilities in the market should be reduced and at the moment we think that insurance companies can infuse more funds into the market, once the restrictions are removed," explained Mehta.

Earlier this year, the Reserve Bank of India allowed banks to invest up to 5 per cent of their total outstandings in equities instead of the earlier norm of 5 per cent of incremental deposits - thus increasing their investible funds from around Rs 60 billion to more than Rs 200 billion. However, banks have not taken full advantage of even the earlier limit due to lack of expertise and a general reluctance to invest in the 'risky' share market.

There are other institutional players in the markets like mutual funds, pensions funds and provident funds. But among these, mutual funds have not been able to wield sufficient clout in the market, while pension and provident funds are still stuck for approval at the labour ministry level.

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