SBI general insurance JV faces roadblocks

Rights that IAG will enjoy are an issue the bank’s board is discussing.

State Bank of India’s proposed general insurance venture with the Insurance Australia Group (IAG) is facing hurdles.

While there is more than one irritant that the bank and the insurer are trying to sort out, sources close to the development said the biggest roadblock is the rights that IAG will enjoy if the proposed venture gets a go-ahead from the SBI board. The issues are likely to be discussed at the board’s meeting on Friday.

According to the terms of the Memorandum of Understanding (MoU) signed in May, SBI will hold 74 per cent in the JV with the remaining being held by IAG. With a 26 per cent stake, IAG will get a veto power in line with the provisions of the Companies Act. The bank’s board had raised a few queries regarding aspects such as moving of special resolutions and capital raising.

A source associated with the deal said the issues are being resolved and the JV is likely to be in place soon so that the company can begin operations in the first half of 2009. In its life insurance venture, SBI Life, India’s largest bank again holds a 74 per cent stake, with the remaining held by Cardiff.

In addition, the fate of IAG is unclear as QBE Insurance, Australia’s largest international general insurance and reinsurance group, has expressed an interest to take over the company. There may be regulatory glitches if the takeover happens in Australia as QBE is associated with Rajan Raheja’s general insurance venture in India. Insurance Regulatory & Development Authority norms do not permit one company to enter into two joint venture agreements in the same business.

The entry premium, which SBI will receive from IAG thanks to its distribution network of over 14,000 branches, including the associate banks, is pegged at Rs 400 crore.

SBI’s foray into general insurance is part of its strategy to have a presence in every segment of the financial sector business. The bank has already strengthened its factoring business through acquisition of Global Trade Finance. It is also pursuing plans of venturing into the private equity arena and is in the process of finalising its custodial services joint venture with Societe Generale.