Private insurers not keen on higher FDI cap despite Sitharaman's offer

Private sector insurance companies are not keen on a higher foreign direct investment (FDI) cap even though Finance Minister Nirmala Sitharaman has offered them the option. They are comfortable as their balance sheets are not leveraged and premium growth is robust especially in the non-life business, with waning competition from the four state-owned insurance companies.

In Budget for 2019-20 the minister said, “The government will examine suggestions of further opening up of FDI in… insurance sectors in consultation with all stakeholders”.

The only change brought in was to allow 100 per cent FDI for insurance intermediaries. Bosses of some of the top insurance companies said additional capital support from abroad is not needed at this juncture. This is quite a change from the repeated pleas to the government to raise the FDI cap to 49 per cent, the industry had made for years till 2015, when it was finally allowed.

The data supports their position. In calendar year 2018, the size of the total mergers and amalgamations in the insurance sector was $2.03 billion, more than double the $903 million recorded in 2017. In 2019, online insurance distribution platform, Turtlemint has raised $25 million in funding while private equity investor True North picked up a 51 per cent stake in Max Bupa Health Insurance Company for about $71.80 million. The largest was of course the HDFC Ergo acquisition of Apollo Munich Health Insurance for about $370 million.

“The sector is consolidating and that is how it wants to grow letting the non life state run companies except for New India to continue dipping their share,” said one of the company bosses. The market share of private sector companies in non-life insurance segment rose from 15 per cent in FY04 to 54.7 per cent in FY19. Their gross direct premium has increased at 15 per cent CAGR in ten years since FY08 to about $10.89 billion in FY18. In FY19 it has reached Rs 929.63 billion ($13.30 billion).

There is another major issue if the FDI tips over the 50 per cent scale. When the NDA government raised the permissible FDI limit to 49 per cent it also changed the rules accompanying the legislation to specify Indian ownership and control has to be retained in the company irrespective of the FDI limit. This meant the beneficial equity ownership would remain in the hands of resident Indians or Indian companies including the “right to appoint majority of directors or to control management or policy decisions”. It has given a breathing space to the Indian joint venture partners vis a vis their foreign partners. If the FDI limit rose to even 51 per cent this clause might need to change. The foreign companies would wish the board rooms of those which take the plunge to look like their subsidiaries elsewhere in the world. This could also raise issues of corporate governance, that is afflicting Indian companies in other sectors.

Given the healthy balance sheets of the private insurance companies, they would want to leverage those to raise private capital from investment firms or public capital through listing. Sector regulator, Insurance Regulatory and Development Authority of India has allowed companies with a ten year track record to list. Companies are allowed to raise capital if they have embedded value of twice the paid up equity capital. 

“Many of them are dividend paying companies and face no pressure to go abroad to raise money,” said one of the respondents. HDFC Life, SBI Life and Icici Prudential have declared dividends in 2019 among others indicating that leverage ratios in the sector is healthy. 

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