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Oct 05, 2012, 03.11 PM IST | Source: CNBC-TV18

FDI in insurance to drive dynamism to industry: Experts

In reaction to the cabinet’s approval to hike foreign investment ceiling in the insurance sector to 49% from the present 26%, Vibha Padalkar, ED & CFO, HDFC Life and Gautam Mehra, ED, PwC discuss how this will help alleviate the stress in the sector.

In reaction to the cabinet’s approval to hike foreign investment ceiling in the insurance sector to 49% from the present 26%, Vibha Padalkar, ED & CFO, HDFC Life and Gautam Mehra, ED, PwC discuss how this will help alleviate the stress in the sector.

Padalkar welcomes the move and adds that this will help bring in a lot of dynamism to the industry wherein the industry, ultimately, stands on its own feet.

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Both Padalkar and Mehra are of the view that the requirement of capital in the industry is very high.

“We must remember that this is a very capital intensive industry. Already about Rs 33,000 crore has been invested as capital and a further Rs 50,000-60,000 crore is required before companies actually breakeven and start making profits,” said Padalkar.

Answering the question on how soon how soon foreign participation may come into the Indian insurance sector, Mehra said it would depend on the requirement for capital or the urgency for requirement of capital at each company level. It will drive how quickly that company goes back to its shareholders for further capital or goes to the public market for further capital.

Below is the verbatim transcript of the interview

Q: How important is this hiking of the FDI limit in the insurance sector? Structurally, how will this help alleviate the stress that the sector has seen for so many years?

Padalkar: This is something that has been promised to the industry right from the beginning. It is, to some extent, living up to these promises. Also, we must remember that this is a very capital intensive industry. Already about Rs 33,000 crore has been invested as capital and a further Rs 50,000-60,000 crore is required before companies actually breakeven and start making profits.

Where will all this capital come from? That question could very well be answered now once this is passed by the parliament wherein companies can tap capital both from local shareholders as well as overseas investors. This will also help bring in a lot of dynamism to the industry wherein the industry, ultimately, stands on its own feet. It is a fairly open market kind of an economy for the industry.

Q: Do you think enough rules are in place in India to ensure that the industry is secure? There are legitimate concerns both in political and in civil quarters that after especially events like AIG, would it happen that some foreign insurer is in trouble in its place of origin, and therefore, decides to quit the Indian market? Would there be, therefore, possible distress? Are enough rules in place in terms of ring fencing the capital that comes, sinking fund etc.?

Mehra: It is important to note that we have had foreign investment in this sector up to 26 per cent for the past few years. You mentioned about AIG, but look at how the industry or the regulator has got over that; it has not really impacted the business of that entity here. With that experience in hand and given the concerns of the industry around capital raising, as Vibha correctly pointed out, the requirement of capital far exceeds the potential risk. We have already had an experience of having foreign investment in this sector for the past few years without any mishaps.

Let’s not forget, we have a regulator in place which will oversee the business closely, whether it is about the governance framework, the risk framework, the policies, the kind of products you can sell, how you can manage the money - all of that is being clearly regulated on an ongoing basis.

Q: How does this change the situation on the ground for you in terms of listing? If this indeed were to come, would you see some companies getting listed in a couple of months or maybe in the year?

Padalkar: Definitely. The timeframe really depends on what is right for each company. But I would imagine that at least one of the questions that every company would have had that is, when will FDI or FII relaxation happen?

Hopefully, that question would be out of the way. What remains is the fundamentals of each company and that would differ widely. Once both the micro and the macro elements for a particular company are right, and targets are met, there is nothing stopping the company from going in for an IPO.

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