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Higher FDI in Insurance: Domestic firms start talks with partners abroad

Formal announcements on foreign partner stake hikes expected from March

BS Reporter  |  Mumbai 

The Insurance Laws (Amendment) Bill, which seeks to increase foreign direct investment (FDI) in the sector from 26 per cent to 49 per cent, has received clearance from the government, with the Cabinet approving an ordinance to this effect. With this, stalled conversations in the sector have resumed.

Arijit Basu, managing director and chief executive officer of SBI Life Insurance, said Finance Minister had clarified any decision taken when the ordinance was in effect would have legal value even if it lapsed before the Bill was passed. “We have already begun discussions with our foreign partner on this front and will take decisions accordingly,” he said.

Insurance sector experts said since approvals would be through the Foreign Investment Promotion Board, applications would have to first be submitted. They said the ordinance was as good as the law and there should be no structural issues for the foreign partners to increase their stakes.

“Only new players may take longer to decide on entering the country. Others will look at opportunities to increase their stakes at the earliest. By the end of March 2015, several players would have signed definitive agreements,” said the chief executive of a large private general insurance company who did not wish to be named.

A key reform initiative by the National Democratic Alliance government, the insurance bill was to be presented in the Rajya Sabha first and then the Lok Sabha. However, due to disruptions in the previous session in the Upper House, the Bill could not be taken up. Hence the Cabinet decided on the ordinance.

After the ordinance is framed it is to be laid before Parliament within six weeks of its first sitting. Parliament can choose to pass the ordinance as a law or let it lapse. Once the ordinance is laid in Parliament, the government introduces a Bill addressing the same issue. This bill highlights the reasons that necessitated the issue of the ordinance. Thereafter, the Bill follows the regular law-making process.

Anup Rau, chief executive officer of Reliance Life Insurance, said the pace of conversations between Indian and foreign insurance partners would rise after the ordinance was approved. “We expect the formalities between insurance partners to be completed in the next few months, since the roadmap for the Bill is now clear,” he said.

Modalities are being worked out among partners to look into multiple options for infusion of capital in existing insurance ventures by an increase in stake or through foreign institutional investors. Reliance Capital has informed the stock exchanges that a board meeting on Thursday, will consider a long-term alliance with a foreign partner, including preferential allotment of a minority stake in the company.

Sector experts said players looking for a foreign partner to divest stakes might also find it easier to do so since the ordinance showed the intent of the government to get more foreign capital into the sector. Reliance General Insurance, for instance, is looking for a foreign partner.

While the insurance Bill’s aim is to improve products and services, the key reform being proposed is an increase of foreign investment from 26 per cent to 49 per cent in local insurance companies.

The composite limit will include all forms of foreign investment, including those by foreign institutional investors and foreign portfolio investors. This could be a significant move to generate and invite FDI and help the sector expand.

However, some players said clarity was awaited on the technical aspects. Deepak Mittal, MD and CEO of Edelweiss Tokio Life Insurance, said companies would go over the legal details before any action began on this front. Amitabh Chaudhry, MD and CEO of HDFC Life, said the industry would to wait for the fine-print before any foreign investment was bought in

Jaitley in his budget speech had said the FDI cap would be raised to 49 per cent in the insurance sector because the sector was capital starved. When the insurance bill was first introduced in Parliament in 2008, it faced opposition over of the FDI proposal. Various options were proposed, including 23 per cent FII and 26 per cent FDI.

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

First Published: Thu, December 25 2014. 00:46 IST