FII interest will be muted, say insurers

But industry is happy that BJP's new FDI clause will at least see the Bill go through

With the Bharatiya Janata Party (BJP) putting a 23% foreign institutional investors (FIIs) condition for raising the foreign direct investment (FDI) in the insurance sector to 49%, there is a revived hope in the insurance industry of the FDI bill being passed.

Former finance minister, Yashwant Sinha during his conversation with Finance Minister P Chidambaram on Saturday had said that if the United Progressive Alliance (UPA) government wants more foreign investment in the insurance sector, it might have to ensure, with an explicit clause in the insurance Bill, that 23% of the equity brought in is from FIIs, non-resident Indians and foreign corporate entities.

According to Sebi norms, no single FII can hold over 10% equity in a firm and a sub-account of an FII cannot own more than a 5% stake. Also, FII money is considered volatile in an industry that needs stable long-term funds.

Industry experts pointed that they were looking forward to positively engaging with the industry’s development in India.

Rajesh Relan, MD & Country Manager, PNB MetLife India said, “Insurance is a long-term capital intensive industry and the companies who are serious players are keen to bring in capital through the FDI route which is considered stable and sticky investment. We have to remember that insurance investment is one of the key contributors towards long-term debt funds and infrastructure investments which is the need of the economy.”

However, he added that FII investment may not be the appropriate option at this environment.

Relan said that another reason in favour of the FDI route is Customer Centricity as insurance is a long-term investment and savings products.

“Hence the ‘hot money’ from FIIs may not be the ideal route for sustainable long-term growth of the industry. India, today, is competing with many other emerging economies for the FDI and the growth story and policies need to be compelling for FDI to come,” he said.



FII investment, according to insurance industry officials, is not a good bet, at a time when the macro-economic indicators have not been very positive.

“FIIs enter and exit the market purely depending on a country’s economic situation. At this juncture, it may not be an appropriate mode of getting foreign investment. With the Indian insurance industry still in its infancy, FIIs may not be looking at a long-term strategy in India,” said the senior executive of another life insurance company.

Insurance players are of the view that whatever be the new clause, it is a positive move for the industry.

Amitabh Chaudhry, MD& CEO of HDFC Life said that the 23% FII clause will attract a different kind of investors. “It is a positive move. In a lot of JV agreements, the foreign partners have a lot of rights. Even if there is a proposal to have voting rights at 26%, it is a workable solution. However, the biggest concern is that the FDI bill has to be passed.”

The FDI proposal for this sector, which is a part of the insurance amendment bill, would have been a welcome reform, especially for insurance industry players planning to go public. Companies in the insurance space have postponed their decision to come up with an initial public offer, owing to fears of lower valuation if the FDI cap is not raised.

Another senior executive from a large private life insurance firm added that the indications from the government showed that the proposal is not on the top priority, at a time when UPA is preparing for elections.

"Different proposals for getting the FDI reform passed, be it 49% FDI, 26% FDI and 23% FII, do bring a ray of hope. But the bill getting passed does look like quite a task," he said.