Mumbai: New rules that stipulate a minimum 25% public shareholding in listed firms can’t be implemented by insurance companies unless the government allows an increase in overseas ownership limits, the industry regulator has said.
The government has been reluctant to push through its own proposal to raise the foreign direct investment (FDI) limit to 49% from 26% in insurance companies fearing a backlash from trade unions and political parties, who oppose the move.
“The FDI limit in life insurance has to be raised first to go with the recent minimum public shareholding norms,” Insurance Regulatory and Development Authority (Irda) chairman J. Hari Narayan told Mint on Wednesday. “We are examining the situation.”
In most insurance joint ventures, the foreign companies hold the maximum 26% stake, with the remaining 74% being held by the domestic promoter. Under company law, a 26% stake gives an entity the power to block any special resolution and foreign insurers will lose board power if their stake goes below the current level.
With foreign partners unwilling to dilute their stakes below 26%, since most have entered the business in anticipation of the limit being bumped up, the local partner will be forced to reduce its stake to 49% to meet the new norms.
That could create its own complications since under Indian company law, a 51% stake ensures ownership.
Several private insurance firms that have been preparing to list will now have to wait as Irda, which is drafting the initial public offering (IPO) guidelines for insurers, will release the norms only after the FDI cap is raised.
The finance ministry last week raised the threshold for public shareholding in listed companies to 25% in phases. In an IPO where the capital of a firm exceeds Rs4,000 crore after the share issue, the company can have a 10% public shareholding initially, but must raise it to 25% by offloading at least 5% to the public every year.
Irda, in consultation with capital markets regulator Securities and Exchange Board of India, has been working on the IPO guidelines for life insurers and the original plan was to release the draft regulations in July.
“The guidelines will now come only after the insurance Bill is passed and the FDI limit is increased,” Narayan said.
The reluctance may stem from the effects of dilution in listed companies.
“All foreign partners have signed the joint venture agreements with a condition that they will enjoy board-level powers with a 26% stake,” said a member of the committee that is working on the IPO guidelines for insurers. He did not want to be named as the matter is sensitive.
“Once the FDI limit is raised, both the joint venture partners may be able to dilute their stake to the public on a proportional basis,” this official said. “We are trying to find a way out and make sure that the domestic partner is not left with a disadvantage while doing an IPO.”
Deepak Parekh, non-executive chairman of Housing Development Finance Corp. Ltd (HDFC), India’s oldest mortgage lender, recently urged the government to push through the increase in insurance FDI limits. Increased stakes would not make any difference to the role of foreign investors as far as the management of insurance firms is concerned, but higher foreign stakes will ensure much-needed capital infusion.
“The government is unable to take a decision because of coalition, since some parties don’t want it. To us it is important, but to the government, insurance is not (that important),” Parekh was cited as saying on 6 June by PTI. “We all want IPO to happen. We want insurance companies to make profits. Today they all are losing money.”
HDFC holds 72.56% in HDFC Standard Life Insurance Co. Ltd. Of the remaining stake, 26% is held by Standard Life Plc and the rest is with others (through employee stock options).
The Union cabinet had approved the comprehensive insurance Bill for raising the FDI limit in October 2008, and introduced it in Parliament in December 2008, but the legislation has not yet been passed in the face of stiff political opposition. This intensified after the 2008 global financial sector meltdown that saw many private firms crumbling and government bailing them out using taxpayers’ money.
Quite a few large privately held life insurers, including Reliance Life Insurance Co. Ltd, ICICI Prudential Life Insurance Co. Ltd and HDFC Standard Life have already announced their plans to hit the capital market.
There are 23 life insurers in the country with total assets worth Rs11 trillion. State-owned insurer Life Insurance Corp. of India is the largest with assets of around Rs9 trillion. Barring a few, most of the private life insurers continue to post losses and all of them need capital to keep the business running.