The finance minister in his Budget speech had announced a composite foreign direct investment (FDI) cap of 49 per cent in the insurance sector, with full Indian management and control. This has opened a Pandora's Box for the industry, especially regarding the composition of the top management team in insurance companies.
Several insurance companies have foreigners as top executives, including John Holden, chief executive of Canara HSBC OBC Life Insurance; Steve Hollow, deputy chief executive officer (CEO) of SBI General Insurance; Shah Rouf, CEO (designate) of Tata AIA Life Insurance and Taketoshi Nagaoka, managing director of Universal Sompo General Insurance (though O N Singh is the executive chairman of the company).
"Full Indian management could mean a predominantly Indian management team. This would include top management members like chief executive officer, chief financial officer and actuary/underwriting head to ensure that crucial company decisions are taken with an Indian interest in mind," said the chief executive of a private life insurance company.
According to the FDI definitions applicable in India, 'control' includes the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders' agreements or voting agreements.
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. "The chief executive is the whole and soul of the organisation. Hence, the FM's announcement could mean that the top executive (chairman or CEO) would require to be Indian and others (like the MD, actuary) can be mutually decided by the joint venture partners," said a senior official of a private general insurer.
Earlier this year, the department of industrial policy and promotion (DIPP) had said that foreign institutional investors (FIIs) and non-resident Indians (NRIs) can now invest in the insurance sector, within the overall 26 per cent cap on foreign direct investment (FDI).
Industry analysts said 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.
Currently, up to 26 per cent FDI is permitted in the sector. In a press note earlier this year, DIPP has said that apart from insurance companies, the relaxation would apply to insurance brokers, third-party administrators (TPAs), surveyors and loss assessors. All of this investment can be made under the automatic route.
The Arvind Mayaram committee on definition of FII and FDI, in its draft report, had also suggested composite caps whereby FDI, FII and NRI investments would form part of the total cap on foreign investments.
All insurance sector appointments are required to be cleared by the sector regulator Insurance Regulatory and Development Authority (Irda). The person's concerned qualification, experience in the industry and salary packages are also to be disclosed to the authority while seeking an approval.
Some executives are also of the view that exceptions could be made for some CEOs if the board (with majority of Indian members) gives a nod to this decision. If so, then all the existing and new appointments would be retained without any changes.
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.
However, in the new model proposed by Jaitley, senior finance ministry officials have publicly clarified that the voting rights of foreign joint venture partners will not be limited to 26 per cent. However, insurance company officials said what is not clear is whether this would be applicable to appointment of the management team.
Full Indian management and control: What this may mean
- A top management with predominantly Indians, with board of directors also having primarily Indians
- CEO/CMD, MD, CFO, Actuary and Underwriters are considered part of top management
- If Insurance Bill is passed, Indian shareholders may get right to appoint top management
- Voting rights for foreign JV partners may not be capped at 26%, unclear on right to appoint top executives
- Control includes the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders' agreements or voting agreements