Insurance Ordinance: Firms wait for enactment before moving on FDI

An insurer executive says foreign shareholders not comfortable with raising their stake at this stage

The Insurance Laws (Amendment) Ordinance, 2014, as promulgated by the President of India, had allowed foreign partners to hold up to 49% stake in a venture.

However, no company has taken a step to increase their stake, with sectoral sources saying JV partners have decided to wait till the ordinance becomes a law.

The ordinance will be taken up in the session of Parliament beginning next week. An ordinance is valid for six weeks from the date a session starts.

"Though, the finance minister had clarified that any action on foreign direct investment (FDI) hike in the duration of the ordinance being in effect will be legally valid, even if it lapses. However, foreign shareholders are not comfortable with raising their stake at this stage, when it is not an Act," said the chief executive of a large life insurance entity backed by finance companies.

Clarity is being sought on several provisions in the ordinance with respect to the conditions for a rise in FDI. It is also being said that foreign companies would have to take the FIPB (Foreign Investment Promotion Board) route to increase their stake in the Indian venture.

An exit clause has not been formulated, as also the mechanism of how the limit can be raised - through equity dilution by promoters or raising of fresh equity. Another area of contention is Indian management control, specified as one of the conditions for an increase in FDI.

The ordinance defines 'control' as 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'.

However, it is not clear whether voting rights of the foreign partner would be restricted and if foreigners can be appointed at the top management. This would include positions like chief executive, managing director and chief financial officer (CFO), apart from the appointed actuary. Sectoral executives said foreign partners weren't happy with voting rights being curtailed and would seek some freedom on that provision.

If fresh capital is brought in, insurers can get additional funds from their foreign JV partners, as well as newer entities. It is estimated the sector would gain an additional Rs 7,500 crore-8,000 crore if FDI is raised.

Existing JV agreements might have to rewritten. The CFO of a mid-size life insurance company said FIPB would want to examine any revised agreement before giving any approval.

UK-based Bupa had earlier said it would raise stake in its Indian health insurance venture, Max Bupa, to 49% from the current 26%. It was the first foreign company to announce an intended raise in shareholding after the ordinance was promulgated.