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| PSBs planning JVs go for call options | |
| Namrata Acharya / Kolkata June 17, 2009, 0:21 IST | |
This will enable foreign partners to hike their stake beyond 26 per cent
Public sector banks (PSBs) with interest in the insurance business are bracing for an increase in the foreign investment ceiling from 26 per cent to 49 per cent.
UCO Bank, which expects to strike a deal with a foreign insurance firm and a domestic bank to float an insurance arm by September 2009, can exercise a call option in the agreement, enabling the foreign partner to increase the stake beyond 26 per cent, once the Insurance Act is amended.
In the case of State Bank of India’s (SBI’s) proposed general insurance venture with the Insurance Australia Group (IAG), there would be a call option and no lock-in period, said sources close to the development. Initially, SBI is supposed to have 74 per cent in this venture. “If the foreign partner wants to increase its stake above 26 per cent, it can do so. But we will set a percentage up to which it can acquire stake. We will have to decide how much the Indian partner can shed in that case,” said UCO Bank chairman and managing director (CMD) S K Goel, maintaining that higher participation by the foreign partner would help scale up the company’s operations.
UCO Bank will be the largest shareholder in the venture but its stake will be less than 51 per cent. The bank is said to be in talks with a few insurance firms, including US-based Liberty, for venturing into the non-life space.
Also, there will be no lock-in period in the agreement, which generally freezes in the ownership pattern of a company for three-five years.
Several recently-launched insurance ventures of PSBs also had call options. Universal Sompo General Insurance, a venture between Allahabad Bank, Indian Overseas Bank, Karnataka Bank, Dabur Investments and Sompo Japan Insurance Inc, has a lock-in period of five years.
However, similar to a call option, Sompo Japan has the first right of refusal to buy shares of Allahabad Bank, which has a 30 per cent stake in the insurance venture. In the case of Star Union Dai-ichi Life Insurance — a joint venture between Bank of India, Union Bank of India and Japanese firm Dai-ichi Mutual Life Insurance Company — the lock-in period is three years with a call option. “In recent joint venture agreements, there have been call options, so that once the Insurance Bill is passed, the foreign partner can increase its stake. The stake transfer will depend on the valuation of the company on the day the sale takes place, rather than on a predetermined basis,” said a source at a consultancy firm engaged in several insurance deals of PSBs. Canara HSBC Oriental Bank of Commerce Life Insurance also has a call option with no lock-in period.
At present, Canara Bank holds 51 per cent, Oriental Bank of Commerce 23 per cent and HSBC Insurance (Asia Pacific) Holding 26 per cent in the company. “FDI relaxation in insurance might help banks having insurance companies.
Because, in such ventures the capital requirement is more, and PSBs alone might not be in a position to capitalise them. In the case of Universal Sompo, there is no need for an immediate capitalisation, but the ownership pattern will depend on circumstances,” said K R Kamath, CMD, Allahabad Bank.
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