CAPITAL STRUCTURE


Requirements as to Capital 

One of the important provisions of the IRDA Act has been substitution of section 6 of the Insurance Act, 1938 with the following provision;

Any insurance company proposes to carry on life insurance, or general insurance business, must have paid up equity capital of rupees one hundred crores or of rupees two hundred crores, if the company proposes to carry on business exclusively as a reinsurer; then only that company can be registered. In determining the aforesaid paid-up equity capital, the deposit to be made by the company under section 7 of the Insurance Act, 1938 and any preliminary expenses incurred in the formation and regulations of the company are to be excluded.

This provision regarding minimum capital of rupees one hundred crores for a life or general insurance company has been made mainly with a view to ensuring that only serious players enter the business. This should reassure the insuring public about the financial viability of private companies. Prior to nationalisation, it was mainly the small, under capitalized insurer, whose financial position was a cause for concern.

Capital Structure 

For insurance companies there are two forms of capital: viz. equity capital and debt capital. Capital structure refers to the proportion of equity capital and debt capital in the total capital. Equity capital refers to that capital which is absolutely belonging to the equity shareholders. It consists of two items:

(i) Equity share capital which is initially contributed by the shareholders, and
(ii) Retained earnings which represents the accumulated profits of the company.

Debt capital, on the other hand, refers to the borrowed capital of the insurance company. A company may borrow money from the public through the issue of debentures. It is very important to keep capital structure balanced. The proportion between the own capital and debt capital should be a balanced one providing safety to the investment and certainty of return.

Comments

Post a Comment

Popular posts from this blog

Insurable Interest

Image
In simple words, insurable interest means monetary Insurable Interest interest. No person can enter into a valid contract of insurance unless he has insurable interest in the subject matter of insurance. A person is said to have insurable interest in the subject matter, if he suffers financially, by its loss or destruction. Thus a person has insurable interest in his own life, in the life of his spouse or child or debtor. Similarly the owner of a property has an insurable interest in it. It is also important, to know the time at which the insurable interest must exist to execute a valid contract of insurance. It depends on the branch of insurance. In the case of life insurance, the insurable interest must exist at the time when the policy is taken. It may not be in existence at the time of the death of the person whose life is insured. For eg. A creditor can insure the life of his debtor to the extent of the debt. Even if the debtor dies after paying off the debt, the creditor ca...
Read more

Definition - Fire Insurance

Image
Definition A fire insurance may be defined as "a contract by which the insurer undertakes, for a money consideration, to indemnify the insured against the consequences of a fire during an agreed period upto the amount stated in the policy.'  According to V.R. Bhushan and Prof. R S. Sharma, a fire insurance may be defined as "an agreement whereby one party, in return for a consideration, undertakes to indemnify the other party against financial loss which he may sustain, by reason of certain defined subject-matter being damages or destroyed by fire or other defined perils upto an agreed amount." The main purpose of a fire insurance contract is to protect the insured against the loss of his property by fire. A fire insurance contract is a contract of indemnity. It indemnifies the insured against any loss caused by fire. To get compensation for loss of property under fire insurance, it must be proved that the loss of property has arisen due to fire. It is also...
Read more

Requirements as to Capital Structure and Voting Rights and Maintenance of Registers

Image
According to section 6A of the Insurance Act, 1938, the following provisions should be made with regard to the requirements as to capital structure and voting rights and maintenance of registers: 1 . A public company limited by shares having its registered office in India, shall carry on life insurance business only, if it satisfies all the following conditions, namely: i. that the capital of the company consists only of ordinary shares each of which has a single face value ii. that the paid-up amount is the same for all shares whether existing or new, except during any period not exceeding one year allowed by the company for payment of calls on shares; 2 . The voting right of every shareholder of any public company as aforesaid shall in all cases be strictly proportionate to the paid-up amount of the shares held by him. 3 . A public company which carries on life insurance business shall not issue any shares other than ordinary shares of the nature specified in sub-sectio...
Read more