Upsetting the plan of Fairfax, owned by Indian origin Canadian billionaire Prem Watsa, to increase its stake in Indian insurance joint venture Go Digit General Insurance, insurance regulator IRDAI has rejected its proposal to convert the company’s holdings in compulsory convertible preferred shares (CCPS) issued by Go Digit Infoworks into equity shares.
Go Digit Infoworks Services, based in Pune, is the parent company of Go Digit Insurance. Fairfax currently owns 45.3 per cent of Go Digit Infoworks, which has an 83 per cent stake in Go Digit General Insurance.
The Fairfax proposal would have increased its stake to 74 per cent from 49 per cent in Go Digit General Insurance, which is engaged in the general insurance business in India. Fairfax is expected to make a gain of approximately $375 million when it achieves majority ownership of Digit.
“In June 2022, Digit Insurance and Fairfax Financial Holdings applied to the IRDAI for approval to convert the company’s holdings in compulsory convertible preferred shares issued by Go Digit Infoworks into equity shares of Go Digit Infoworks,” Fairfax Financial Holdings said in a note.
“The IRDAI subsequently communicated that the application cannot be considered in its current form as conversion of the Digit CCPS would result in Digit (currently classified as an Indian promoter of Digit Insurance) becoming a subsidiary of the company, which is currently prohibited for Indian promoters, notwithstanding that the foreign direct investment rules have been amended to allow foreign investors to own up to 74% in an Indian insurance company,” Fairfax said.
Fairfax said it will pursue its plan to increase its stake in the Indian insurance venture. “Digit, Digit Insurance and the company intend to continue to explore all avenues under applicable law to achieve the company’s majority ownership of Digit through conversion of the company’s Digit CCPS, and the company expects to report a gain of approximately $375 million when it achieves majority ownership of Digit,” it said.
The IRDAI is likely to tighten rules on how a holding company can invest in its Indian insurance subsidiary in the wake of its rejection of Fairfax’s application for converting its holding (Digit CCPS) into equity shares of Go Digit Infoworks. The regulator is likely to stipulate that an insurance company promoted by a special purpose vehicle or a non-operative financial holding company can’t issue convertible instruments of any kind and no stock options or sweat equity can be issued to the employees and directors of SPV or NOFHC.
Market regulator Sebi recently kept in “abeyance” the proposed initial public offering (IPO) of Go Digit General Insurance which filed draft papers for the IPO with the regulator on August 17. The company, which has cricket player Virat Kohli and his wife actor Anushka Sharma as investors, announced plans to raise Rs 1,250 crore through a fresh issue of equity shares and an additional offer for sale (OFS) of 109.4 million shares by a promoter and existing shareholders.
The joint venture partners of Go Digit have applied to the IRDAI for a new license to set up a reinsurance and a life insurance venture. Both Axis Bank and HDFC Bank have already announced their decisions to pick up stakes in the proposed life insurance venture.