Of late there has been an unprecedented boom in IPOs, like it was in the early 1990s. There is, however, a vast difference between the current scenario and what existed earlier. The increasing awareness of shareholders’ rights in recent years coupled with stringent IPO norms and the entry of various brokerage firms has increased the probable risks for companies raising capital through public offerings. <b1>
The signatories of a public prospectus, such as the directors, officers and employees of a company, have a personal responsibility for its contents because investors decide to invest in such securities on the basis of representations made in the prospectus. If felt cheated, the investors can press for damages; resulting into legal expenditures for a company. Besides, genuine errors and omissions can also be misconstrued as misrepresentations by astute investors and analysts who may press for damages in case of a loss on their investments. “Such legal expenses and damages can’t be predicted and defined beforehand and can be financially devastating for a company,” says Rahul Aggarwal, CEO, Optima Insurance Brokers.
In April 2006, for instance, a US underwriting bank agreed to settle pending IPO-related claims for $425 million. And according to an Allianz Global Risk Report, the settlement followed a conditional $1 billion settlement in 2003 entered into by more than 300 issuers and individual defendants who went public during the high-tech boom of the late 1990s. These facts alone call for adequate protection among the corporations for potential liabilities arising due to misrepresentations, misstatements and forward-looking statements, among others, and “along with the recent IPO boom have fuelled the growth of IPO-related liability covers in India,” informs TA Ramalingam, Head, Underwriting, Bajaj Allianz General Insurance.
An IPO liability cover, also known as Public Offering of Securities Insurance (POSI), is designed to protect the board of directors, key managers, employees and the company. The policy offers indemnity to insured in respect of public offering of securities “for actual, alleged or attempted breach of duty, breach of statutory duty, breach of trust, breach of warranty of authority, neglect, error, misstatement, misleading statement or any other wrongful acts or omissions,” says Ritesh Kumar, Head, Retail — Rural and reinsurance, ICICI Lombard.
In short, “an IPO liability policy offers companies an opportunity to ring-fence the significant exposures in a securities offering,” quips Farzan Khansaheb, Head — Financial lines, Tata AIG General.
However, as POSI is a transaction-specific policy, the company is ensured of a separate limit and coverage, rather than compromising the limits under their D&O (Directors & Officers) policy which offers broader coverage for errors and omissions arising out of directors and officers’ fiduciary duties to the company. Also, “the coverage is for a longer period of time, usually 3 to 6 years (versus 1 year for a D&O policy), taking into account the longer-term exposure of the company with respect to the issuance of public offerings and avoiding the difficulties of obtaining a renewal should there be a claim,” says Pavanjit Singh Dhingra, Vice President, Prudent Insurance Brokers.
Apart from initial offerings, POSI can cover secondary offerings as well as private placements, and the premium payable depends on various underwriting factors including the size of the offering, type of issue, target investors, territory of the offering, and the risk factors disclosed in the offer document. General insurers such as Bajaj Allianz, ICICI Lombard, TATA AIG, HFDC and Cholamandalam are currently offering IPO liability insurance in the Indian market. If nothing else, by buying this cover the insured can focus on its core business activity, while the insurer can take care of the legal proceedings. Therefore, selection of the insurer, their experience in writing the liability and more specifically the financial liability covers, the claims handling capability and the financial stability are the major factors that should be taken into consideration while opting for this cover.