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Monday, January 02, 2006

Cos seek insurance cover for public offerings

With the growing interest of FIIs in domestic equity market, several companies going for public issues are opting for a new insurance cover, which would serve as a safeguard against any legal suit for wrong information in the public offer documents, reports The Hindu Business Line.

The insurance cover called `Public Offerings of Securities Insurance, POSI,' also covers claims by the underwriter of the issue.

Some of the companies, which have recently opted for this cover in the country include Jet Airways, Suzlon, NTPC, Punj Lloyd and Sasken Technologies. All these companies raised the money in domestic market.

POSI covers the wrongful acts of a company and its directors arising from the issue of a prospectus. If a company or its directors provide wrong information in the offer documents, the shareholders can file legal suits. Insurance would cover the legal costs incurred in defending civil and criminal proceedings relating to prospectus liability.

The cover also includes claims made by the underwriter or sponsor of the issue, which could arise due to warranties and indemnities given by the company or the directors personally in the agreement with the sponsor.

"The limit of the insurance cover depends on the risk perception of the company, the size of the issue, the business the company is involved in and the route through which capital is being raised," said Praveen Vashishta, CEO, Managing Director, Howden India.

Howden India, an arm of Howden UK, is one of the providers of this specialised liability insurance cover in India.

Vashishta said the cover purchased in India could be in the range of USD 10 million to USD 120 million. If a company were going for an ADR issue, exposures to US Securities Laws would attract a higher risk rating and subsequently a higher premium. The cost of the cover is usually 2-4% of the limit of indemnity required.

He said the cover is usually purchased for three years and for a single premium payment and is underwritten by a select group of underwriters at Lloyds and major London Market Insurance Companies.

According to the research done by Howden globally, the allegations that have translated to highest average settlement include "Directors and Officers making false revenue disclosures which require reinstatement (USD144 million)" and "Improper accounting practices (USD 115 million)".

Vashishta said that while in the US and Europe the main source of claims (40%) under liability insurance is shareholders' action, in South-East Asia and India, it is regulatory action that is mainly the cause.

In India, liability insurance accounts for just 3% of the total non-life premium. This segment generates an annual premium of around USD 80 million. In the US, however, liability insurance accounts for 70% of the non-life premium.


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