The National Insurance Company has barred regulated entities from borrowing money to meet their recapitalisation requirements.
The Director, (Policy & Regulation), NAICOM, Agboola Pius, said this while speaking on the topic, ‘Recapitalisation roadmap: Implementation, expectation and benefits’, during an insurance seminar.
He also said that the capital base of an underwriter was of great importance as it would help it to underwrite more risks as a large proportion of the local risks were presently ceded outside because of low retention capacity.
While speaking on the features of paid-up share capital that would constitute the companies’ new capital in the sector’s ongoing recapitalisation, he said, it would be absolute paid-up share capital, as distinct from solvency capital / capital fund/ capital base.
He said, “For the avoidance of doubt, and for an instrument to be treated as paid-up share capital, the following criteria among others must be satisfied.
“It must represent the most subordinate claim in liquidation of the insurer/ reinsurer; The investor is entitled to a claim, only on the residual assets that is proportional with its share of issued capital, after all senior claims have been paid in liquidation (such that it has an unlimited and variable claim, not fixed or capped claim);
“The principal is perpetual and never repaid outside of liquidation; Distributions are paid out of distributable profit or retained earnings; There are no circumstances under which the distributions are obligatory; It must not be a loan on the company or margin facility whatsoever.”
While speaking on the tendency to improve corporate governance over-sight, he said where management and the board tend to have exclusive control over the company, they preferred raising capital through preference shares and debt capital.
The owners/ holders of debt capital did not enjoy any voting rights, he noted.
Agboola said, “Corporate governance oversight is one of the major regulatory concerns in Nigeria. The increase in capital would introduce major new big owners to the insurance industry and this may bring new ideas, innovations and improve oversights resulting in better corporate governance in the system.
“Using our experience as an illustration, merger which dilutes organisation control power, could produce a good output.”
He said that capital structure referred to the way a firm choose to finance its assets and investments through some combination of equity, debt or other internal funds.
This mixture determined the capital gearing of a company, he added.
He said, “The ratio between debt capital (fixed interest) and equity capital (variable dividend) is called capital gearing. It is high gearing when the proportion of debt capital is high than the equity share capital. In order to protect the interest of equity shareholders, the company uses proper mix of various types of securities in its capital structure.