Not Just Difficult, but Impossible Task

Irda has said that foreign shareholding in parent cos should be brought down to 49% in a year

New rules proposed by India’s insurance regulator could thwart investment plans of some of the world’s biggest insurance companies and work against the government’s attempts to simplify laws on foreign ownership, industry executives say .

The Insurance Regulatory and Development Authority (Irda) has stipulated that all insurance companies seeking higher foreign ownership should comply with norms that restrict such increase to only companies owned and controlled by Indians at the parent level. This, experts say, is likely to prevent higher foreign ownership in some of India’s biggest private sector insurance players such as HDFC Standard Life, owned partially by UK’s Standard Life.

The Narendra Modi government came to power last year promising to lift growth, provide jobs and sweep away archaic rules holding back business and investment.

His government also promised to make rules simpler and easier for foreign investors and the insurance Bill allowing foreign ownership of up to 49% in Indian insurance companies was a key item on the agenda. But the passage of the Bill has been followed by heartburn due to the clause on Indian ownership and con trol. By insisting on Indian majority ownership at the parent level, the law may make it very difficult for large scale insurance FDI. It also makes things complex and cumbersome, be lying government assertions of a transparent and simple FDI regime.

“We are waiting for the matter to be resolved by the department of finan cial services,“ said Amitabh Chaud hry , MD and CEO, HDFC Life. The problem for foreign insurance firms and their Indian partners is acute. It is no longer a simple job of increasing investment by handing out a cheque and securing clearances. The partners also have to ensure that the entity which controls the Indian investment in the insurance venture is majority owned and controlled by Indians.

For instance, mortgage giant HDFC owns 74% in HDFC Standard Life. Standard Life wants to increase its stake in the firm from 26% to 35% and leave some room for FIIs in case the firm floats an IPO.Under current rules, they will not be allowed to do this. This is because parent HDFC is owned 80% by foreign offshore funds, making it echnically a foreign-owned firm.

Irda has said foreign shareholding n parent companies should be brought down to 49% in six months o one year, a considerably difficult ask as it will have to involve massive selling by large overseas inves ors in some of the marquee blue chips. This is not just difficult but quite impossible as there is no reason why FIIs would sell just because of insurance sector regulations.

“This will have an implication on he current ownership of the exist ng companies,“ said G Murlidhar, MD and CEO, Kotak Life Insurance. Kotak Mahindra Bank, the parent of the insurance venture, has a sim lar problem. Foreigners do not yet own a majority but Kotak wants to ncrease its FII ceiling from 48% to 55%. Its application has been put on hold as the FIPB feels the increase would affect its insurance venture.“Every insurer being an Indian insurance company and who have already been granted certificate of registration for carrying on insurance business in India shall ensure he compliance of Indian owned and controlled as specified in Sec ion 2(7A) of the Act within six months from the date of notifica ion of these regulations,“ Irda said n a circular. The draft of the regula ions was sent to companies on June 8, and Irda is expected to soon notify guidelines.

Some experts are peeved that the change was made only in the recent amendments to the Bill. Offshore strategic partners could have substantial control rights on operational and financial policy decisions of he joint venture in the earlier regime which is now not possible.“One could argue that these regula ions amount to a retrospective application of a new law since the cri eria of `owned and controlled’ did not apply to insurance companies prior to 2015 Amendment Act,“ said Simone Reis, partner-M&A, Nish th Desai Associates.

Source : Economic Times

Date: 24-06-2015

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