Insurance cos may be forced to merge
KATHMANDU, MAY 17 -
Insurance companies will be subjected to forceful merger if the Insurance Board (IB) deems it necessary.
As per the provision in the ‘ Insurance Merger Directive’ introduced on Wednesday, the regulator will first seek clarification from companies on why they should not be forced to merge. The clarification should be submitted within 21 days after it is sought. “If the board is not satisfied with the clarification, it can direct the companies to merge by clarifying why the board asked them to do so,” states the merger directive.
The board’s directive has come at a time when insurance companies are struggling to increase their paid-up capital to the required level. The IB has directed insurance companies to increase their paid-up capital to the required level by mid-April 2014. The paid-up capital fixed for non-life insurance companies is Rs 250 million while it is Rs 500 million for life insurance companies. The provision of forceful merger has created pressure on insurance companies to go for merger. IB chairman Fatta Bahadur KC said the directive has been implemented from Wednesday.
The board introduced a directive to encourage mergers between insurance companies while the financial sector has been seeing a flurry of unions between banks and financial institutions.
As per the directive, only insurance companies of a similar nature are permitted to merge. This means two or more life insurance companies can combine to become a larger life insurance company. Likewise, non-life companies have to merge with non-life companies.
The directive has also announced a number of facilities for insurance companies going for a merger. The facilities are extension of the deadline to increase the paid-up capital by one year, a one-year deadline extension to bring investments to fixed areas and a two-year deadline extension to bring down the share of any individual or company to below 15 percent if it exceeds that level during the time of the merger.
It has also extended the time limit to put together the necessary paid-up capital by another year for these companies if they fail to meet the deadline. Similarly, companies failing to invest the specified ratio in prescribed areas will be provided another year to reach the standard.
Similarly, the directive has also provisioned providing a concession in management costs if they exceed the prescribed limit after the insurance companies are merged.
The directive has also fixed the procedures of merger. Companies willing to merge first have to apply to the IB jointly, and the regulator can give a letter of intent for merger if it believes that it will help promote the sector and the proposed merger does not hinder the interest of the insured.
Companies can go for a merger only after their annual general meetings endorse the special proposal with a deadline and proposed scheme, according to the directive. Those going for a merger have to appoint a valuator to assess their assets and liabilities within 60 days.
They also have to conduct a due diligence audit (DDA) to identify the whole financial situation of the merging companies. The DDA should identify the net worth, reserve fund status, investment status, position of the manpower, use of information technology, stock prices in the secondary market and solvency status. The DDA should also look into the status of claim settlement and adequacy of the risk fund.
For insurance companies operated by foreign investors, an additional agreement paper should also be presented if they want to merge. Those going for a merger have to sign an agreement that includes how the assets and liabilities would be assimilated, the proposed name of the merged entity, share ratios of the companies for merger and the changed capital structure, among others. They have to submit an application in a prescribed form.
Source: The Kathmandu Post
