IPO Insurance: Coverage, Claim & Exclusions

Updated: 13-10-2022 06:25:02 AM

There are a lot of Indian companies that wish to expand and grow. Some companies focus on raising capital from the Indian capital market to meet the expansion plans of their businesses. However, there are a lot of risks that are associated with litigations that the company may be subjected through its shareholders. Keeping in mind such alarming and sensitive risks, some insurance companies in India have started offering Initial Public Offering Insurance or IPO Insurance.

What is IPO Insurance?

The companies that are listed on BSE or NSE have threats or risks that may cause severe damage to the reputation of the company and also result in huge financial loss. Regulatory authorities can take severe legal actions on the breach of the Securities Law. The liabilities may also arise from the inaccurate information presented to the investors in the Prospectus. In some cases, the liabilities may result in claims to be settled on the grounds of breach of undertakings contained in the underwriting agreements. In such a situation, not only the company faces severe damages to the reputation and its treasury but the management or the company’s directors, the underwriters etc. may also have to face lawsuits. Hence, it becomes so important for a company to have financial protection against all such prospectus liabilities offered through a IPO Insurance Policy. Some insurance companies offer such insurance cover with other names like Public Offering of Securities Insurance or IPO Insurance.

What all IPO Insurance Covers?

• IPO Insurance protects the insured against securities claims arising from an offering of a company’s securities.
• Coverage for liabilities arising from negotiations, discussions and decisions in connection with the offering.
• Coverage for punitive and exemplary damages.

How IPO Insurance Functions?

IPO Insurance is availed by companies and its directors who are involved into the risk of capital raising from public. It functions when investors suffer loss which results of relying on a defective disclosure document via underwriter, directors and the company making the offer. Investors can sue these parties to recover losses. Through IPO Insurance, covers to companies and its directors can be availed for the claims made by investors in connection to the offering.

IPO Insurance Claim Process

All insurance companies that offer IPO Insurance may have a Claims Process that meets their internal criteria and systems. Below mentioned are certain steps for IPO Insurance claim process:

• In a condition that is covered under this insurance policy may give rise to the prospectus liability claim, the insured may send a written notification to the insurance company as early as possible
• The notification may include full details of a Public Offering Claim, the parties involved, copies of any documents commencing proceedings, details of any official investigation etc
• Upon registering the request for the claim by the insured, the insurance company may provide defense costs on incurred basis prior to final disposition or adjudication
• Mostly all insurance companies render support to the insured party or the policyholders and provide consultation regarding the proposed action for settling the liability claims
• Any lawyers appointed by the insured must be approved prior by the insurance company and the insured should not commit any settlement unless approved and provided in writing by the insurance company
• The insured party shall request all appropriate defense and cross-claims for contribution, indemnity or damages
• The claim amount under various sections in the policy or the insurance coverage would not exceed the sum assured under each risk as covered in the policy and hence one must always allocate appropriate sum assured while dealing with prospectus liability
• If the policyholder comes across any issues that are not been handled effectively by the Branch or Regional Office, then mostly all insurance companies provide clear instructions for resolving issues as mentioned in the policy document by reaching out to alternate channels for resolution

Documents Required for Claim Process

• Copy prospectus / listing particulars
• Percentage of securities to be offered
• Value of securities being offered
• Copy of placing / underwriting agreement
• Proposal form

Time Taken to Settle the Claim

IPO Insurance is provided by very limited insurance companies in India. Claims can be settled by the insurance companies as soon as possible, until and unless no fraudulent activity is involved.

Exclusions under IPO Insurance

Some of the exclusions under the IPO Insurance generally offered by various insurance companies in India are:

• Known issues and notifications along with any prior claims are generally excluded from this policy offered by various insurance companies in India
• Deliberate or intentional infringement of law is mostly excluded from this policy offered by the insurance companies
• Pollution or environmental damages are also excluded
• Property damage and a physical injury caused to a third-party is also generally excluded from such policies
• Penalties, fines, and other expenses uninsurable by the law are also excluded mostly from such a policy
• Major shareholder exclusion is a very common exclusion under this policy offered by insurance companies

Companies offering IPO Insurance in India

• Tata AIG General Insurance
• Bajaj Allianz General Insurance
• Optima Insurance Solutions

Important Aspects

Before purchasing IPO Insurance, individuals are required to look at the critical things which shouldn’t be ignored as mentioned below:

• Exclusions of the policy
• Claim Settlement Ratio of the insurance company
• Eligibility Criteria

Advantages of Buying IPO Insurance

Some of the advantages of buying IPO Insurance Policy are listed below:

• One of the major benefits of this type of insurance is preventing the cost of defending any claim against the company, its directors or officers, and underwriters
• All legal costs or any such costs related to the litigation of the Prospectus liability claims are covered under this policy as offered by the insurance company
• The investors who suffered losses due to incorrect or misleading information provided in the Prospectus can claim for the full loss under this policy
• Long-term coverage with a tenure ranging from 3-6 years can be adopted under this policy
• Some insurance companies also provide worldwide coverage including coverage for American Depository Receipts if required
• Emergency costs in advance and counseling services extensions are also offered by few insurance companies in India
• Based on additional cover options or riders, one can insure the financial costs that may arise due to other risks like the pecuniary penalty, aggravated damages, public offering inquiry cost, emergency cost advancement, etc.
• The insurance premium can be capitalized as part of the cost for fundraising

FAQs

Q1.  Who all can buy IPO Insurance Policy in India?

Prospectus Liability, Public Offering of Securities Insurance or IPO Insurance Policy is designed for companies that are trying to raise capital from the market through the publication of the prospectus. Any company that is trying to make introductory offerings through IPO, or looking to raise capital for secondary offerings and private placements can also adopt such a policy.

Q2. How much coverage is generally required by the company which is seeking a IPO Insurance?

The coverage limit under this insurance policy depends on various factors including the size of IPO, the asset size, additional risks to be covered, the financial performance of the company etc. Hence, the company must consult the insurance company in-depth regarding the optimum cover.

Q3. What are some insurance companies in India offering IPO Insurance?

Tata AIG General Insurance, Bajaj Allianz General Insurance, and Optima Insurance Solutions are some of the insurance companies in India offering IPO Insurance.

Q4. Are only Director and Officers covered for any liability insurance under this policy?

Directors and Officers Insurance comes separately. Few insurance companies provide rider options with IPO Insurance that stretches the cover to not only the directors, officers, employees, and underwriters but cover the company itself and various risks that may arise associated with IPO or Securities Offerings.

Q5. What are some of the costs that are not included in the loss coverage under this policy?

Any fines and penalties other than pecuniary penalty, taxes, and matter related to the law of the land in which IPO is offered could be some of the exclusions from the loss coverage.