Insurance JV shareholders to have say on equity infusion

Rajya Sabha select committee proposes composite cap, call on infusion of fresh equity or sale of existing stake to be taken by respective companies

Shareholders of insurance companies will soon be able to choose if they want fresh equity or sell their existing stake. Industry sources said the Rajya Sabha Select Committee on the Insurance Laws (Amendment) Bill, 2008, chaired by BJP Rajya Sabha MP Chandan Mitra, has not made it mandatory to have fresh equity infusion as part of foreign direct investment (FDI) cap.

The is because joint ventures of insurance companies have different agreements to infuse capital.

“It is not possible to have a written definition on the mode of capital infusion. While some bigger joint venture partners may look at fresh infusion from foreign shareholders, others may look into different structures since the foreign partner may be capital constrained,” said the chief executive of a private life insurance company.

The Bill — which seeks to raise the FDI limit in the insurance sector to 49 per cent from the 26 per cent allowed now — will have a composite cap of 49 per cent for FDI, foreign institutional investment and non-resident Indians’ investment.

Due to differences between members of the Parliament on this Bill, it was referred to a select committee of the Rajya Sabha headed by Bharatiya Janata Party's Chandan Mitra. The select committee of the Rajya Sabha presented its report on the bill which was adopted with the Opposition Congress on board and only four of the 15 members of the committee dissented.

The report is slated to be tabled in the Rajya Sabha on Wednesday, two days before its extended deadline. The parliamentary logjam also having been resolved this morning, the Modi government's intention to get its reform agenda rolling with a nod to the insurance Bill in this winter session looks within reach.

Insurance executives are of the view that this provision would help foreign joint venture partners have a structured approach to raising stake, especially at a time several such foreign partners are facing huge fines by regulatory authorities abroad. "A call for fresh equity may dissuade some partners to bring in more cash immediately since they are financially constrained at this point," said the chief financial officer of a mid-size private life insurance firm.

Fresh equity would mean immediate capital to expand the insurance business by offering additional products and services, alongwith branch expansion. Some areas of business, especially health and motor insurance are considered to be money guzzlers since a significant portion of revenues go in paying claims. Hence, fresh equity would help those companies who have not been very active in these spaces to increase investment in these fields.

If fresh capital is brought in, insurers can get additional funds from their foreign joint venture partners as well as newer entities. Estimates said that the sector would gain an additional Rs 7500-8000 crore if FDI is passed.

An area where clarity is still required is the area of Indian management control. Finance Minister Arun Jaitley in his Budget speech had proposed a composite Foreign Direct Investment (FDI) cap of 49 per cent in the insurance sector, with full Indian management and control.

The issue of Indian ownership and control as recommended by the select committee has been defined in the Bill with 'control' including the 'right to appoint the majority of directors or to control the management or policy decisions, including by virtue of their shareholding or management rights or shareholder agreements or voting agreements'.

Senior insurance executives are of the view that it is still not clear if top management will only be Indian citizens and whether voting rights would be capped. On one hand while there is confusion on what the term 'full Indian management' means, some industry players are of the view that this would include only the chief executive.

Industry analysts said that there could be a tweaking in the existing model to allow foreign experts to act as 'advisors' or close allies to the Indian top management. "Senior professionals of foreign origin may become advisors to guide the management team on crucial policy matters, so that their role is retained and insurers comply with the FDI rules," said the managing director of an advisory firm.

When the Insurance Bill that was first introduced in Parliament in 2008, it faced huge opposition because of the FDI proposal. There were various routes proposed, including models like 23 per cent through foreign institutional investor (FII) route and 26 per cent through FDI. However, the Parliament was unable to arrive at a consensus.

The former United Progressive Alliance (UPA)-led government had also looked at hiking FDI in insurance to 49 per cent, without any increase in voting rights. This, however, was not accepted by the other parties. Forty-nine per cent FDI for insurance and pension was mooted when Pranab Mukherjee was the finance minister, but the decision to approve the proposal was deferred by the Cabinet.