Government Seeks IRDA Exemption; Wants LIC To Invest Over 15% In Credit Guarantee Fund

The Finance Ministry is seeking an exemption from the insurance regulator to allow Life Insurance Corporation of India to hold more than 15 percent in a credit guarantee fund, two people familiar with the development told BloombergQuint.

If LIC is granted an exemption by the Insurance Regulatory and Development Authority of India, the insurance company is likely to hold 49 percent stake in the fund, said the first person quoted above.

The credit enhancement fund is being set up to help raise the credit rating of bonds floated by infrastructure companies and to make it easier for investors to invest in such bonds. The proposal was part of the Union Budget announced earlier this year, where the government said that LIC will set up a dedicated fund to provide credit enhancement to infrastructure projects.

The insurance regulator, however, had raised concerns as it saw a conflict of interest in LIC providing credit enhancement to bonds that it may itself invest in, BloombergQuint reported on September 22.

To address these concerns, the government has asked India Infrastructure Finance Company to spearhead the setting up of the fund, which is expected to be operational by December.

"The idea is to have a broader basket of investors, and LIC has asked not be the mentor of the fund," said the second person quoted above, a finance ministry official who spoke on the condition of anonymity.

As per the proposed business model, IIFCL will invest Rs 150 crore in the fund. The company has approached the Asian Development Bank and International Finance Corporation for funding, said the first person quoted above.

IIFCL has also requested the Reserve Bank of India to allow the infrastructure financing company to maintain a lower capital adequacy ratio of 10 percent, said the first person. Currently, IIFCL has to maintain a capital adequacy ratio of 12 percent as it is a 100 percent government owned entity. Other non-banking financial institutions have a capital adequacy ratio of 15 percent.

LIC is likely to invest Rs 250 crore in the fund if the IRDA approves the request for an exemption, while the rest of the required capital will come from three to four public sector banks. The government is in advance talks with the State Bank of India, Punjab National Bank, and Bank of Baroda to invest in the fund, said the first person.