Indias insurance regulator on Friday published guidelines for life and non-life insurance companies to participate in securities lending and borrowing (SLB) and reverse repo and repo transactions in government and corporate debt securities.
The Insurance Regulatory and Development Authority (IRDA) invited comments on the guideless within 15 days of their publication date. It wants insurers to put in place a risk management mechanism and to formulate policies for undertaking such investments.
The draft guidelines say insurers can lend only up to 10 per cent of their total equity holdings in SLB transactions.
“Equities lent in SLB would not be treated as if the insurer owned such equities and all benefits arising on such equities shall be available to the insurer i.e. the beneficial rights of the insurer shall continue,” it said.
Life insurers should limit their activity in repo and reverse operations to 10% of controlled funds, said the regulator. Non-life insurance companies should also limit their activity in in reverse and reverse-repo operations at 10% of investment assets.
The tenure of repo transactions, it added, will be for a period of 180 days, with the prior approval of the investment committee of the insurance company.
Insurers would be allowed to undertake repo and reverse operations only in AAA- rated corporate debt securities, said the regulator.
Additionally, IRDA said that insurers would not be permitted to undertake such operations in debts of promoter group companies.
The regulator also proposed insurers could participate in credit default swaps on corporate bonds market as users (protection buyers).
“The CDS would be permitted as a ‘hedge’ to manage Credit Risk… mandatory rating for both the issuing company and the Referenced Entity shall be prescribed by the board of the insurers,” it said.
Besides, it said that “All CDS transactions shall be reported to the Investment Committee, Audit Committee and to the Board on a Quarterly periodicity”.
(JDC)