IB bars insurance companies from distributing dividends

KATHMANDU, Sept 28: Insurance Board (IB) on Tuesday restricted all insurance companies operating in the country from distributing cash dividend to their shareholders unless they meet the new minimum capital set by the regulatory authority.

The capital requirement norms of IB seek life and non-life insurance companies to raise their paid-up capital to Rs 500 million and Rs 250 million respectively - a rise of 100 percent and 150 percent respectively than the previous requirement.

The Board has set a deadline of mid-July 2013 to prop up the capital base.

“The minimum paid-up capital requirement was raised after holding discussions with all the companies and all had agreed on it,” Shekhar Kumar Aryal, spokesperson of the Insurance Board, told Republica. “This was basically done to protect the interest of policyholders and to ensure that the companies do not face liquidity crunch.”

However, none of the companies so far have taken the step to meet the new capital requirement. The fresh directive issued to force the companies to comply with the IB directives has, meanwhile, prevented people holding stocks of insurance companies from enjoying cash dividends for some time.

“To compensate them, the companies can always issue bonus shares,” Aryal said.

There are 25 life and non-life insurance companies in the country. These companies are now allowed to run the business after securing a paid-up capital of Rs 250 million and Rs 100 million respectively.

“But the business volume of these companies, with such a little capital base, has reached billions of rupees,” Aryal said, adding, “This has raised fears of companies defaulting on payments when they have to make huge cash settlements in one go.”

Because of similar concerns, the government, last year, floated the idea of raising the capital base of life and non-life insurance companies to Rs 2 billion and Rs 1 billion respectively. “But the new measure cannot be implemented unless amendment is made to the current law - a draft of which has been submitted to the Finance Ministry for approval,” Aryal said.

Since the country´s bureaucracy has a history of dragging its feet while endorsing new laws, the Insurance Board had decided to raise the minimum capital requirement on its own without waiting for the government to enforce the law.

“Besides, the new capital requirement proposed by the government can only be implemented five years after enforcement of the new law,” Aryal said.


Published on 2011-09-28 00:32:39

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