Mumbai: The Insurance Regulatory and Development Authority (IRDA) has pared equity exposure in a single company to 10 per cent for all insurance companies in a bid to provide level playing field to private insurance companies vis-a-vis state-owned insurers.

This is the first of a series of changes in rules proposed by the insurance sector regulator to provide private sector insurance companies operational parity with state-owned Life Insurance Corporation (LIC).

Once the new rules come into force LIC would have to bring down its exposure limit in a single company from 30 per cent to 10 per cent. This would deprive LIC the flexibility it enjoyed on its investment portfolio.

As per the revised guidelines, both LIC and private sector insurers can invest 10 per cent of outstanding shares or 10 per cent of their total funds, whichever is lower, in equity shares of a single company.

The IRDA is also studying a proposal to make changes in the LIC Act to enhance its capital base from Rs5 crore to Rs100 crore. This will help LIC comply with the minimum capital prescribed by the IRDA Act.

The changes in investment norms followed recommendations by a working group set up by the IRDA, to review comprehensively the current regulatory and other provisions on investments of insurance companies and suggest changes considered necessary in the light of experience gained / the constraints faced by insurance companies, as well as the developments in financial markets.

The working group reviewed the statutory provisions on the pattern of investment, operational and policy issues of investment regulations and suggested amendments that would provide flexibility to the IRDA in the manner of regulation on investment of life and general insurance companies. The group also looked into the concurrent modifications in the formats of the prescribed returns to reflect the changes.

LIC had had picked up a 27-per cent stake in Corporation Bank a few years ago. While this may have to be brought down to 10 per cent in a phased manner, the new regulations are silent on how to do this.

LIC also currently holds more than 10 per cent in companies such as Ranbaxy, Mahindra, L&T.

The government, however, has not amended the LIC Act to bring the investment norms into force. LIC may be able able to hold on to equity stakes in companies where it has a huge exposure till such time when the Act is amended.

The government will also have to bring in legislation to hike FDI limit for insurance companies from 26 per cent to 49 per cent.

LIC was given two years to adhere to the exposure norms stipulated for private insurers after the sector was opened up in 2000. However, IRDA decided to step in only after six years although the the transitory period expired in 2002.

LIC has gained hugely from its its equity investments in company shares that offered high returns in order to meet investment guarantees.

LIC has also dipped into policyholders' funds to pick up strategic stakes. Besides, LIC's premium income largely comes from unit-linked-insurance plans, where part of the premium is invested in equities if the policyholder exercises this choice.