Corporates flocking to international markets for IPO insurance

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The IPO market has been growing. Not only in terms of numbers but also in terms of size. Consider this, Zomato which recently got listed had an issue size of Rs 9,375 crore, making it the sixth biggest Indian IPO ever by issue size. Riding the euphoria, it got oversubscribed by 38 times on the last day of the bidding process on July 16, 2021. 

With an unprecedented IPO boom comes a growing awareness of the responsibilities of the directors and officers of companies. Considering potential liabilities, companies generally opt for risk mitigation measures, in which IPO insurance is considered as an effective risk transference mechanism.

Generally, a company seeks insurance of up to  10-15% of the issue size. A few of the leading insurance providers in this space include TATA AIG, HDFC ERGO, ICICI Lombard, and Bajaj Allianz General Insurance. 

However, with bigger coverage sought as well as limited capacity offered by Indian insurers, an increasing number of companies have started flocking towards international markets. “Any company buying IPO insurance has to disclose how much liability limit they want to cover. The Indian market has traditionally been offering only $150 million worth of limit. The more is the size of the IPO, generally, the more is the limit sought by these companies. Unfortunately, the Indian market has not been able to provide beyond $150 million till now, and if anybody is looking for higher capacity then one has to shop in the international market for reinsurance capacities,” said Rohit Jain, Head of India, Willis Towers Watson.

With LIC and big unicorn IPOs lined up, Indian insurers are expected to scale up their capacities. “With more unicorns planning to list in the billion-dollar range, it is expected that insurance companies will start building their capacities internally in India. If the trend continues for next year, we will see increased capacities from the Indian market itself,” said Jain.

Key features 

IPO insurance is also known as Public Offering of Securities Insurance (POSI). The cover is designed for any company raising capital through IPO, secondary offerings or private placements. The policy covers the company and its directors, officers and employees for claims brought against them in connection with the offering. 

It can also cover liabilities arising from negotiations, discussions and decisions in connection with the offering, including punitive and exemplary damages. Though it doesn’t concern the investor directly, having POSI cover helps as the investor becomes protected indirectly.

“It has existed for long, but now, with unicorns trying to get listed, IPO insurance has found a renewed prominence. Earlier it used to be another run of the mill cover. But given that IPOs of these companies are pretty massive, this has become quite critical,” said Jain.