Industry welcomes insurance FDI limit hike to 74%; management control clause remains a concern

Finance Minister Nirmala Sitharaman, while presenting the Union Budget 2021-22 on February 1, said the foreign direct investment (FDI) limit in India's insurance sector will be hiked to 74 percent from 49 percent.

At the face of it, the proposal is a positive development for the country's insurance industry that has been saddled with dual issues of stagnating growth amidst the COVID-19 pandemic and rising needs for capital infusion. Insurers welcomed this proposal, saying that this reform would help infuse the much-needed foreign investments into the sector.

But there are big caveats in FDI limit being hiked to 74 percent. Firstly, it would require a legislative change requiring an amendment of the Insurance Laws (Amendment) Act 2015 and the Insurance Act 1938. Remember that the 2015 change in insurance laws that had hiked the insurance FDI limit to 49 percent from the earlier 26 percent took seven years and multiple tweaks in the proposed Bill before being approved by legislators. The biggest bone of contention was the fear of foreign investors with vested interests and short-term profit motives taking control of Indian insurance companies.

With the FDI limit being hiked to 74 percent, that concern among senior politicians within the ruling party would only get aggravated. Moneycontrol had reported how the FDI proposal has faced mixed reactions among the government's allies and how there was a demand to retain complete control with Indian shareholders. To ensure that a middle ground is reached, Sitharaman on February 1 announced in her Budget speech that there would be adequate steps taken to have Indians at the helm of affairs at these insurers even if FDI limit is hiked to 74 percent.

“Under the new structure, the majority of directors on the boards and key management positions will be resident Indians with at least 50 percent directors will be independent directors. A specified percentage of profit will be retained as general reserve,” said the minister. When the FDI limit was hiked to 49 percent, several foreign players had hiked their stake in the Indian insurance ventures. They include Nippon Life (JV partner in Reliance Life Insurance), Tokio Marine (JV partner in Edelweiss Tokio Life) and Japan's Dai-ichi (JV partner in Star Union Dai-ichi Life with a 45.94 percent stake).

"Not all foreign partners hiked their stake from 26 percent to 49 percent because there were some disagreements over stake hike and valuations," said the chief financial officer of private insurer. Recently, Belgian multinational insurer Ageas acquired a 23 percent additional stake from IDBI Bank in IDBI Federal Life Insurance for Rs 460 crore. This bought Ageas’ stake in the insurer to 49 percent.

There are still a handful of Indian insurers where foreign partners hold 26 percent stake or below. These include Bajaj Allianz General Insurance, Shriram Life Insurance, Canara HSBC OBC Life Insurance, Future Generali India Insurance and Bajaj Allianz Life Insurance.

The caveats to the deal

On the other side, however, Sitharaman also said the FDI limit hike would allow "foreign ownership and control".

Moneycontrol spoke to senior executives at three insurance companies, two life and one non-life. The consensus was that the finance ministry needed to clarify what the exact position on management control was.

“When the insurance laws were amended in 2015, Indian management control clause was something that was open to interpretation. Each insurer had to consult their internal legal teams to decide what was permissible and what wasn’t. We would need to get clarity from the government on what are the rights/benefits that would be given to the foreign partners in exchange of FDI investment,” said the chief executive of a mid-sized private life insurer.

'Indian management control’ was a clause inserted when the insurance FDI cap was hiked to 49 percent in 2015. This clause meant that the all board-level matters related to appointments, company strategy and business expansion would have to be approved by a majority of Indian shareholders. While in her 2021 Budget speech, the finance minister did not explicitly use the words ‘Indian management control’, it was clear that would be the case even if the FDI limit was hiked to 74 percent.

“If the board and top management needed to have majority resident Indians, then it clearly means that representation of foreign partners in the insurer will be negligible,” said the head of legal and compliance at a non-life insurer.

Will foreign investors pump in money?

Once the insurance laws are amended and the fine-print of the ‘safeguards’ in allowing an FDI hike becomes clear, foreign investors (including existing joint venture partners) would take a decision on pumping in money into Indian insurers. Moneycontrol spoke to two foreign joint venture partners in Indian insurers. These JV partners, who are global insurance majors, said the proposal doesn’t look "exciting enough".

“When a foreign investor is putting close to Rs 800-900 crore into an insurance company in India by way of FDI limit increase, they should get significant control and ownership in the venture. However, at the face of the FM’s announcement, it looks like complete control will be vested in the hands of Indians. So how does it benefit foreign partners,” said the head of South-East Asia (including India) at a global insurance major that is a shareholder in an Indian life insurer.

He added that board rights should be strictly proportional to the quantum of stake that an investor/partner holds in an insurance company. Another global insurance executive said the government could look at other ways of protecting domestic interests, including minimum lock-in for insurance investments and 50-50 board memberships.

“There seems to be a perception that foreign partners are entering India to purely make money and hurt policyholders' interests. This isn’t accurate. If a foreign partner is ready to take up 74 percent stake, they should at least get 50 percent representation in the board. The Indian government could seek a 10-year or 12-year lock-in in the insurance venture to ensure that the business is stable,” said the India country manager for a multinational insurer.

The government will first seek Cabinet approval for the FDI limit hike proposal. Following this, the insurance law amendment proposal would be sent to the sector regulator IRDAI for approval. This would then be tabled in both the houses of Parliament for approval.

Source: Money Control

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