Mumbai: Religare Health Insurance Co. Ltd has initiated stake sale talks with domestic and global private equity (PE) firms to raise capital, according to three people, including two directly involved with the transaction. None of the three wished to be identified.

“The transaction includes raising of about 200 crore in lieu of a minority stake," said one of the two people directly involved in the negotiations. “The talks have just begun and the final contours of the deal are yet to emerge."

“It’s a PE deal and the company could raise capital from both domestic and global investors," said the second person. “If any of the foreign funds buy a stake in the company it should not be less than 26%. But since Religare Health Insurance is willing to sell more than 26% stake, domestic funds too have been approached."

The company is in talks with global investors including LeapFrog Investments, TPG Capital and General Atlantic, among others, said the third person.

In a 5 February press note, the department of industrial policy and promotion clarified that the 26% cap on overseas investments in insurance companies would include foreign direct investment (FDI), foreign institutional investor (FII) investments and investments from non-resident Indians (NRIs). Many private insurers have demanded that India raise the FDI cap to 49%, but a draft law that proposes the change is still to be approved by Parliament.

According to Religare Health’s website, its existing shareholders are Religare Enterprises Ltd, Union Bank of India and Corporation Bank. The exact proportion of stake held by these entities isn’t known.

A spokesperson for LeapFrog said: “We never comment on speculation." LeapFrog Investments specializes in investments in financial services firms in Africa and Asia and has invested in Indian firms such as Mahindra Insurance and Shriram Credit Co Ltd. On Monday, LeapFrog said it invested $29 million in IFMR Capital, a non-banking financial company based in Chennai. General Atlantic India managing director Sandeep Naik declined comment. TPG Capital could not be immediately reached for comment.

A spokesperson of Religare said: “The information is incorrect and baseless."

Currently, there are 28 general insurers in India, including five stand-alone health insurance companies such as Cigna TTK Health Insurance Co. Ltd, Max Bupa Health Insurance Co. Ltd, Apollo Munich Health Insurance Co. Ltd and Star Health and Allied Insurance Co. Ltd.

Gross direct premium of Indian general insurers has grown at an average annual pace of 17.6% to 57,964 crore in the year ended March 2012 from 11,446 crore in fiscal year 2002, according to a KPMG report released in May. The growth in the general insurance industry has kept pace with the nation’s nominal gross domestic product (GDP) growth rate, resulting in general insurance penetration remaining stable in the range of 0.55-0.75% over the past 10 years. The general insurance sector is expected to grow at an average annual rate of 16% to about 194,000 crore by fiscal year 2020 from 57,964 crore in fiscal year 2012, according to the same report.

The retail segment within the health insurance market is expected to grow at a robust pace driven by increased penetration in smaller cities, substitution of out-of-pocket expenditure with health insurance spends, increasing urbanization, demographic shifts and increasing costs of medical procedures, the report said.

Tata Capital Growth Fund and Alpha TC Holdings Pte Ltd invested $20.41 million in Star Health and Allied Insurance in the only PE deal in the sector last year, according to VCCEdge, which tracks investment activity in the country. There were three insurance deals worth $24.1 million in 2012.

Though the banking, financial services and insurance sector is generating strong interest amongst investors, the FDI cap of 26% in insurance is making investments unattractive, according to an investment banker.

“For existing investors, exits are a challenge as public offerings markets have dried up. PE (firm) to PE (firm) sales are a challenge due to the FDI cap as investors prefer primary stake too," said Vineet Toshniwal, managing director of Equirus Capital Pvt. Ltd, adding that there are very few local firms that can invest in large transactions.