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    IRDAI cautions insurers against loading up on bonds of HDFC cos

    Synopsis

    Early April, mortgage lender Housing Development Finance Corp (HDFC) proposed the merger with HDFC Bank. After the announcement, insurers wrote to their regulator Irdai on the permitted exposure limits in the individual entities.

    Rupees
    Irdai did not respond to ET’s query on the matter.
    India’s insurance regulator has advised insurers against loading up on the bonds of HDFC Group companies, saying details on permitted exposure thresholds must await the effective amalgamation date for what’s billed as the country’s biggest merger.

    Early April, mortgage lender Housing Development Finance Corp (HDFC) proposed the merger with HDFC Bank. After the announcement, insurers wrote to their regulator Irdai on the permitted exposure limits in the individual entities.

    “Irdai shall be issuing necessary instructions on applicability of exposure norms only after the announcement of the effective date of the merger,” Irdai said in its note to the insurers. ET has seen a copy of that note.
    IRDAI Cautions Insurers Against Loading Up on Bonds of HDFC Cos

    Some investors were seen buying bonds of the HDFC Group, anticipating regulatory clearance that could open up additional limits on the holdings in individual companies. The regulator appears to have advised insurers against such a practice.

    “Investment committees of insurance companies are hereby advised to take note of the above (the reference to the effective merger date) and take further exposure to the above entities considering the proposed amalgamation without pre-empting any regulatory relaxations for complying with extant regulations applicable to exposure norms,” Irdai said in the note bearing the subject line “Merger of HDFC Ltd and HDFC Bank Ltd – Reg.”

    Irdai did not respond to ET’s query on the matter.

    A life insurer can invest in HDFC Ltd bonds under the combined category of “housing and infrastructure” that mandates an upper investment threshold of 15% of the assets under management. General insurers have additional headroom.

    However, HDFC Bank falls under a different category. An insurance company has a cap of 30% when it comes to investing in the banking and financial services sector. Irdai recently increased the investment limit for insurance investment in the financial sector to 30% from 25%.

    Some insurers have reportedly been buying bonds of HDFC Ltd on the assumption that the exposure to the mortgage lender may be counted under the higher sectoral limits applicable to BFSI after the home financier is merged with the bank.

    Insurance companies with a larger share of HDFC Ltd bonds earlier held internal meetings for a possible realignment of portfolios.

    "If long-term investors like insurers shy away from HDFC Ltd papers, it could weigh on bond yields unless further regulatory clarity comes up," said an investment banker. "The narrowing differential between HDFC Ltd and Bajaj Finance yields could be an outcome of a combination of factors like demand-supply and demand appetite," the person said.

    Both HDFC Ltd and Bajaj Finance, the country's leading consumer financier, are triple-A rated. Although they are not strictly comparable in terms of secondary market liquidity and primary bond sales, the average yield differentials across three-year, five-year and 10-year segments have compressed by about 10-15 basis points, dealers said.

    Total outstanding bonds/non-convertible debentures of HDFC Ltd and HDFC Bank stood at nearly Rs 2.12 lakh crore at the beginning of the financial year, showed data from Prime Database, an analytics firm. The largest mortgage lender has sold bonds worth Rs 1,74,356 crore, with the bank raising Rs 37,452 crore.



    ( Originally published on Jun 28, 2022 )
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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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