KARACHI, July 5: The Orient Insurance Company Limited (OICL) has entered into an agreement to amalgamate business with another publicly traded company— Business and Industrial Insurance Company Limited (BIICL)—which is set to be the first ever merger in the insurance industry in Pakistan.
The decision to combine businesses was made at the meeting of the board of directors on Thursday, a compelling reason for which is understood to be to raise their combined equity base.
The Insurance Ordinance 2000, which replaced the Insurance Act, 1938, stipulates that general insurance companies increase their paid-up capital to a minimum of Rs80 million by the year 2004.
Fazal Rehman, managing director at Orient Insurance told Dawn that higher capital was, surely, one of the reasons that prompted his company to opt for merger.
And in doing so, both companies appear to have found a perfect match, for Orient—a B.R.R group company with registered office in Karachi— holds Rs40 million in paid-up capital. BIICL based in Islamabad has Mian Mumtaz Abdullah—a former chief of Corporate Law Authority (CLA) and the precursor to the current SECP—at the head of its Board. The company’s paid-up capital is Rs41 million. The two companies have posted a mediocre record of performance since listing in mid nineties. Having scarcely paid any dividend, the market price of their stocks have generally stood at massive discounts to the par values.
In terms of the Scheme of Arrangement for Amalgamation endorsed by the Boards on Thursday, the whole of the undertaking of Orient Insurance would be transferred and vested in BIICL, following which Orient would go into “dissolution without winding up”. The shareholders in Orient would be allotted 0.92 shares of Rs10 each in BIICL in exchange for each share of Rs10 held in Orient.
All of the arrangement is of course subject to the sanction of the Court, endorsement by regulators and the approval by the members in general meetings of both companies.
The insurance industry in the country is currently in turmoil as majority of the 58 companies (53 local and five foreign) are struggling to keep afloat in a sea of crisis. Motor insurance had been the bane of business since long, but marine and fire have also started to contribute startling losses, with many companies barely managing to survive on non-core income from dividend and interest income from investments. Standard Insurance Company, for instance, lives almost entirely off the rent income that it earns from its Victorian era head office building, located on I.I. Chundrigar Road in Karachi.
The KSE had voiced industry demand in the budget proposals for normal tax rate of 5 per cent on dividend income of insurance companies and exemption of their capital gains to bring them at par with other investors in the securities market. Those remained unanswered in the last two budgets.
As many as 20 of the 36 listed insurance companies are still short of the Rs80 million minimum paid-up capital. Most of those smaller companies run the risk of being pushed out of business unless they conform to the new regulations. But what options do they have? Given the stock market’s unhealthy appetite for additional new offerings and the huge discounts in the market prices of their stock, an attempt to raise paid-up capital by asking shareholders for cash in right issues is bound to be frustrated. Mergers and Acquisitions (M&A) then, appears to be the only way for such companies to be able to survive.