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Experts debate on Insurance Amendment Bill

Published on Mon, Aug 11, 2008 at 11:22 | Source : CNBC-TV18

Updated at Mon, Aug 11, 2008 at 16:25

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Experts debate on Insurance Amendment Bill

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Shikha Sharma , MD, ICICI Prudential Life Insurance feels insurance companies need to list within ten years and added that the amendment would sort out the shareholding anomaly in the Insurance Act.

However, Ashwin Parekh , National Leader Global Financial Services, Ernst & Young Insurance feels the amendment may be delayed unless all players are on the same page and said the confusion in the industry would delay the chances of the bill being passed before the next elections.

Rahul Bajaj , Chairman, Bajaj Auto feels the Indian promoters' stake reduction to 26% is unlikely. He does not expect the government to make the listing of insurance companies mandatory. He feels the government will focus more on the banking and pension bill now and said Indian promoters are waiting for better valuations.

Excerpts from CNBC-TV18's exclusive interview with Ashwin Parekh Rahul Bajaj and Shikha Sharma:

Q: You have heard some rumblings from Delhi about what could be the contours of the shareholding patterns what are you expecting?

Parekh: The first precursor to the major reform was raising the Foreign Direct Investment (FDI) for foreign investors from 26-49%. Bring down the Indian promoters stake to 26% may be mandated. It is preparing grounds for the 26-49% for the foreign partners with the view that both the partners are at par and they would decide how much of their equity collectively or individually they would want to offer to the markets as the sector opens up. The 26-49% transition should happen anytime now.

Q: Coming on that how did you read that possibility of the Indian promoters stake or the requirement to bring in down to 26% going away? Firstly, do you think it will happen, secondly what does it mean for a company like yours, ICICI in the joint venture that you are in?

Sharma: There is an anomaly in the regulations as it stands today. If The FDI limit is raised from 26% up to 49% and the still insist that Indian promoters have to come down to 26%, then it will change the equations of companies forcibly. I don't think that was the intention when the regulations were being put out. This is the precursor to the 26% to 49% happening.

ICICI Prudential has been one of the privileged companies. We have had enough capital from both promoters to fuel the growth of this company, over the last seven-years. There is a requirement in the Act, which says that companies need to list by 10-years and if we have to list then it is important that the shareholding equation between the two promoters be resolved. It will be a good step in terms of our ability to list if the 26-49% happens, and if the clarity on the need to dilute Indian promoters holding comes through as well.

Q: What are you reading into this first bit of a floater that the requirement of 26% for Indian promoters will go and eventually it is the first step in moving towards 49%, are you reading it as that?

Bajaj: No, I am not. I cannot speak for the whole industry but it is my view of industry and I do not want to speak about my individual company. Indian promoters coming down 26% will not take place, there is no question of a possibility. It will not take place. It is an anomalous position in the law that was not intended in the new proposed bill that has been taken care of. Similarly, after ten years, the government or the Insurance Regulatory and Development Authority (IRDA) could ask you to list your company but that will not take place at least as of now.

There was no provision mandating it. So no bill will require a change in it. I do not know the exact composition of the bill, which the group of ministers either have just seen or will soon see. It will soon go to the cabinet but none of us will be required, those were the old days. Neither the government nor the IRDA will ask any Indian company to list. There is going to be no coming down to 26%, that is crazy and unbelievable, it will not take place.

As far as increasing FDI limit to 49% is concerned, it will come one day probably after the elections. It will come in the next parliament, depending on the composition of the new government they may or may not bring it in. But now you will have the banking bill, you would have the pension bill, both have been introduced in the Lok Sabha, both the bills have gone through the standing committee on finance. They have the right to pass the bill but the question is - Will the Bhartiya Janta Party (BJP) support go through. If the BJP i.e. National Democratic Alliance (NDA) opposes.

But this is not right, this has not been introduced into the Lok Sabha and it cannot be introduced in the Rajya Sabha because this will dim the finance bill. It will have to come to Lok Sabha and if it does not pass before the Lok Sabha is dissolved, the bill will lapse. We will then have to reintroduce it in the next parliament.

Indian promoters are getting better valuations. I would prefer it to be delayed.

Q: What exactly is the situation between you and Allianz in the light of this change that we are discussing?

Bajaj: They will have a call option as and when the government allows the FDI limit to go up to 49%. We would prefer it delayed and because the government is keen for divestment and other reforms. The government may go through the banking and the pension bill. They would need the BJP-NDA support otherwise it could be difficult. I think this insurance bill will go to the next parliament.

Q: What is your sense? Do you agree with Mr. Rahul Bajaj that it probably stands a better chance after the elections or you are hopeful that they can try and push it in the next few months?

Sharma: Mr Rahul Bajaj is definitely the expert on this topic. He has a much better understanding of this situation so I would go along with his view entirely.

Q: Is it better for the industry if this gets delayed as the chances of your Indian promoters getting a better valuation increases?

Sharma: Mr Rahul Bajaj definitely has a much better understanding of this situation and I would go by his assessment of what is likely to happen.

The industry is highly capital intensive and its access to foreign capital is only going to improve the industry's ability to grow and to innovate in terms of products, which might require more capital going forwards.

Q: What did you make of what Mr Bajaj just had to say? Do you agree or disagree?

Parekh: When we opened up the industry both the Indian partners and the foreign partners looked at the framework that was available at that point in time, and there was certainly a promise that was made to the foreign investors when these reforms were introduced about 8-9 years ago.

We have go to fulfill those promises. The credibility of the country and the credibility of the industry to that extent is a bit hazy.

Any reform of any nature is normally carried out to create a conducive environment for the industry. It does not look at what is good for one company or for one set of promoters. If it is good for the industry and it is good for partnerships, then it has to be good for rest of the system, so one has to look at what is good for the industry. We are not talking about one or two companies who have deep pockets. After 5-6 years of working, they have now realized that they have been able to grab a good market share. Their valuations are far different from that they themselves expected, they may have not even have thought about these valuations when they started the journey which is a very good thing. In the normal course therefore the right thing to do is to let the reforms take shape as they were originally envisaged just to maintain the credibility of the reforms. Individual companies then determine based on whatever they need to do at that point in time whether they want to exercise that Call option or whether they do not want to. It is a matter of partners sitting down and working out their own individual arrangements.

There are about 16-17 companies in the industry, out of those first 6 or 7 are the one's who have deep pockets and rest of them would really be very eager to create a new environment, where capital can flow in. To that extent 26-49% migration is a very welcome move for those companies.

Q: Also wanted your thoughts on the do-ability factor, which Mr. Rahul Bajaj spoke about? Do you think it is doable or do you think the government will not push the ones which are already introduced because the chances of them being actually push through are far higher?

Parekh: Mr. Rahul Bajaj is far more into it. He knows the entire dynamics of it. If one where to go by the intent put out by the government, then there is a good reason to believe that the government is looking at this very seriously. In the last four years they kept making attempts but the attempts didn't go through. Now of course they want to make an honest attempt.

If the industry works in a very heterogeneous manner, and gives mixed views to the government in the process then the entire system gets confused, basically. Mr Rahul Bajaj knows more about the subject. The chances of this government taking it through would be even more complicated if there are confused signals from the industry itself. There is a far bit of dynamics and a balancing act to be worked out.

Q: There has been some talk that the recent buyback of Employee Stock Option Plans (ESOPs) sort of sets a floor valuation and that's what the market picked up as a signal. Was that the intention?

Sharma: Mr KV Kamath of the ICICI Group set the floors. Whether he is going to set the floor at that level higher or lower is a question you should ask him. Fresh capital that has been brought into the company at this point of time and the new ESOPs that have been given to employees at the beginning of this year have been done on the basis of fair valuation of the company conducted by an independent valuer.