The new proposal to increase foreign investment in insurance may not mean that promoters of insurance companies get to cash in on a portion of their stake. That’s because the finance ministry may be inclining towards allowing additional foreign investment only though the issue of fresh equity, and not a stake sale.
The government has gone against the recommendation of standing committee on finance when it comes to hiking FDI in insurance. It wants to hike FDI in the sector from 26 percent to 49 percent. But there’s a twist. It wants to keep FDI limit at 26 percent and allow 23 percent as investment through the FII route.
Ashvin Parekh, partner at E&Y said, “One of the questions came upto the finance minister, whether the increase from 26 percent to 49 percent level will account or arise out of FDI or there is a room for FII as well, he said foreign investors, he did not say foreign direct investment.”
But some experts feel that foreign promoters who have been waiting to hike their holdings will not agree readily to a combination of FDI and FII.
Amitabh Chaudhry, MD & CEO, HDFC Life Insurance added, “There are number of foreign promoters who have stated very clearly, that they would like to increase their stake upto 49 percent.”
The government, keen on paving the way for insurance companies to get some much-needed capital, also plans to allow foreign investment only through the issue of fresh equity. The argument here is that if promoters sell their stake, the money will go to the promoters and not the company which means that insurance companies will first have to list on the exchanges.
Such a listing will also help insurance firms comply with IRDA guidelines which allow life insurance companies to raise additional capital from foreign institutional investors based on fair pricing guidelines and that could pose the next problem.
SB Mathur, former secretary of Life Insurance Council said, “Only those companies which are in a position to raise IPO will benefit and as per norms, hardly five-six companies on the life side and two-three companies on non-life side would be eligible to raise capital.”
The fresh issue rule also adds another dimension. Existing foreign partners will have to infuse more capital in the company to keep their stake at 26 percent.