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No distinction between FDI and FII a dampener for insurance sector

While raising the foreign investment limit, the government clubbed FDI and FII flows

Business Standard Editorial Comment  |  New Delhi 

The failure to distinguish between foreign direct investment (FDI) and foreign institutional investment (FII) is stalling a major economic reform. Much hope was raised in March this year, when the government responded to a long-standing demand and, aided by a show of unprecedented maturity by the opposition, amended the law to raise the limit in insurance companies from 26 to 49 per cent. While raising the limit, however, the government clubbed and flows within the overall limit. Consequently, a clause in the new law, which forms part of the draft rules circulated by the (Irdai), has put a damper on the early enthusiasm as it impacts not just the joint ventures but their parent companies, too.

In accordance with the amended law, the new rules allow an Indian insurance company to have foreign investment, including portfolio investment, up to a limit of 49 per cent of its paid-up capital. But the problem is the new rules go one step further by stipulating that insurance companies that want to raise the level of foreign ownership will be restricted to those whose Indian parent company is owned and controlled by Indians. The rules also stipulate that (including both and FII) in such parent companies would be calculated while defining the extent of in their insurance subsidiaries. There is nothing wrong in applying the principle of beneficial ownership in determining actual shareholding of a company or a subsidiary. But this gets complicated when a cap includes both and stakes in a company. Extending the FII/limit to the parent company has already created unwarranted complications for one of India's largest private insurance companies, HDFC Standard Life, of which the Indian housing finance giant owns 74 per cent and the UK-based Standard Life has the remaining stake of 26 per cent and now wishes to raise it to 36 per cent. The draft norms suggest that it will not be able to do this because, bizarrely, the Indian parent HDFC is considered "foreign" because roughly 80 per cent of its shareholding is held by foreign offshore funds. The fact that these portfolio investors play no role in its management and that it is run by Indians located in India does not appear to signify anything. If the shareholding is calculated on a pro rata basis, HDFC's step-down subsidiary is already in breach of foreign shareholding limits.


It is odd that neither nor those responsible for drafting the amendment thought it necessary to address this problem before the law was tabled in Parliament, since would have, in effect, violated the amendment even as it was being introduced. This restriction is creating problems for several other Indian parent companies of insurance ventures. The implications of the new rules are serious. To comply with them, parent companies of several such insurance joint ventures will now have to sell stakes to bring down the foreign shareholding component, a move that is hardly likely to achieve the intended purpose of attracting long-term capital to finance India's urgent infrastructure needs. The way out of this situation is to restore the earlier definition of a cap for insurance joint ventures. This would mean the stakes should be excluded while calculating the level in both the parent and the subsidiary companies.

(Disclosure: The restrictions on will also affect the Kotak Mahindra group, which along with associates owns a significant stake in Business Standard Pvt Ltd.)

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