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Insurance IPOs still 2-3 years away

The Union Cabinet has approved up to 49 per cent foreign direct investment in the insurance sector but listing of these will take some time, as the process of foreign promoters raising their stake will have to be first completed.

In addition, detailed procedural approvals from the insurance and market regulators will also take time. As a result, insurance companies said it might take between two to three years for these to be listed on the stock exchanges.

Amitabh Chaudhry, managing director of HDFC Life Insurance, said after the Insurance Bill was passed, their joint venture partner, Standard Life, would decide how much to increase their stake to. “We might take three to six months to decide on how to go forward. Even if the foreign partner wishes to increase its stake, the Foreign Investment Promotion Board (FIPB) will have to give its approval, based on the shareholder agreements on proposals like Indian management control,” he said.

CHALLENGES FOR LISTING

  • Foreign partners not ready to increase stake due to financial constraints
  • No clarity on Indian management control, since foreign JV partners would want some representatives from their side too
  • Procedural hassles, with first application to be made with Irda for initial approval, followed by application to Sebi and final approval from Irda
  • Agreements with pre-determined price for stake hike may pose hurdle for foreign partner in raising stake
  • FIPB approval needed for FDI hike, after JV partner decides to raise stake. New agreements may have to be signed
  • Few insurers yet to break-even, hence their IPO desires may not be approved

The Bill will be taken up in the current session of Parliament and is expected to be passed in both chambers, especially as the opposition Congress party has stated it will not oppose it.

Sector experts say FIPB will take into consideration several factors before approving an FDI rise in any insurance company. Indian management control is still a grey area, with no clarity on what this would exactly mean. “If this means only Indians can be appointed in the management team, some JV partners may take objection,” said a life insurance company’s chief executive.

For some companies, issues like prior agreements between the Indian and foreign partner might hinder any immediate rise in stake by the latter, constraining efforts at listing. In spite of an increase in the FDI limit, officials say the Allianz Group of Germany, which operates in India through two joint ventures (life and general) with Bajaj Finserv, might delay on a decision. Allianz did not respond to a mail sent by Business Standard. By an agreement signed in 2001, the two entities have an agreement that is valid up to 2016 regarding transfer of shares in the two JVs. According to the agreement, the transfer was to happen at original cost plus fare return (at a pre-determined range), subject to the banking regulator’s rules. But if such a transfer takes place after 2016, it will happen at the market price. The agreement had said that Allianz could go up to 50 per cent in the general insurance business and 74 per cent in the life insurance business.

In addition, for life insurance companies, profitability is an issue for listing, as some of them are yet to break even. By Insurance Regulatory and Development Authority (Irda)  norms, a company has to be in the insurance business for 10 years to be eligible to list on the equity market. The regulator considers the financial performance, capital structure post offer and solvency margin, among other factors, to give its nod.

Listing of the state-run general insurance companies will also see these entities elevate to the next level of growth, a development the regulator is also keen on.

Regulatory officials say two or three of the public general insurance companies are financially ready to be listed. This, they said, would take them to the next phase of growth and also lead to better scrutiny of the management and its books by shareholders.

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