HDFC Standard Life will look at FDI in insurance: Mistry

Keki Mistry, vice chairman and chief executive officer, HDFC told CNBC-TV18 that the slew of reforms announced the government are very positive and have helped India avoid the possibility of a downgrade.

"The implication of a downgrade would have been terrible, because interest rates would have gone through the roof, the currency would have collapsed and confidence would have really taken a beating," he elaborated. The government hiked foreign investment ceiling in the insurance sector to 49 per cent from the present 26 per cent. With the Cabinet approving the proposal, the Insurance Laws (Amendment) Bill is likely to be taken up by Parliament for passage in the forthcoming Winter Session. Mistry informed, HDFC’s insurance arm HDFC Standard Life will definitely consider it if the Parliament approves the bill. "We have an agreement with Standard Life that enables them if they wish to increase their stake in the insurance company at a fair value," he added. Below is the edited transcript of Mistry's interview with CNBC-TV18. Q: How will the institutional holding pattern look like post the Carlyle deal? A: Nothing changes much. Carlyle had about 3.7 percent odd of the shares. They sold 3.7 percent and a significant portion of that 3.7 percent if we believe has been bought by foreigners. Effectively, what it means that the FDI shareholding comes down, the FII shareholding goes higher. But other than that, it won’t make too much difference. My reckoning is that the FII shareholding in HDFC now will be around 71-72 percent. We have to wait for the details from the registrar before we can be sure of the percentages. Q: What have you made of the slew of reforms that have been announced overnight? A: Very positive. These reforms were so very, very necessary particularly in the context of the fact that as we were looking at the early part of September, India was actually looking at that possibility of a downgrade. The implication of a downgrade would have been terrible, because interest rates would have gone through the roof, the currency would have collapsed and confidence would have really taken a beating. It was necessary for the government to come out with these reforms. It started sometime in the middle of September with the increase in the diesel prices and the cap on the LPG cylinder. All are very, very positive. The spate of reforms that we have seen a subsequent to that, a little bit of that is making up for lost time, but it has improved sentiment dramatically in the system. It is not just the reforms that you are seeing in the system that is important, what is more important is the fact that the Finance Ministry is actually interacting with players in the market, talking to banks, insurance companies and mutual funds to understand what the issues are, so those issues can be addressed. That is more positive in terms of actual delivery of performance rather than just the big bang reforms that we are talking about which are very good from a sentiment perspective. For example, insurance still needs to get parliamentary approval. We got to wait and see whether the parliamentary approval happens in the December session or not. Q: How will HDFC Life Insurance itself utilize this increased FDI that they can now avail of? A: HDFC Standard Life would definitely look at the FDI in insurance. We have an agreement with Standard Life that enables them if they wish to increase their stake in the insurance company at a fair value. Once the bill gets passed Standard Life will have to take a call to decide whether they want to go up to full limits, or they want to go up to a certain extent. That’s the call they will have to take. _PAGEBREAK_ Q: Does the insurance arm require additional capital now? A: Capital and insurance company is a function of growth. The growth in decent times has been relatively less. For example, if you take the first quarter of the financial year our growth in new business premium for individuals was around 17 percent. As the growth picks up, if the growth was to pick up significantly then that growth requires capital. If the reforms which are being talked about in the insurance sector - faster approval of projects, new products being designed and so on and so forth, once those get implemented, one would believe that the growth in the insurance sector would pick up. Depending on the quantum of growth would be the question on whether the insurance company needs capital or not. Q: How have you read the pension reforms? Does that have the proclivity to raise savings or investments into equities? A: Pension is a product which is very popular in the western world. It is almost a must because once you are retired after working for several years you need to have some kind of an annuity. You need to have a product where every month your future is taken care of by putting money into a pension fund. The most important thing to my mind for pension reforms to happen is you need a change in the tax rules. Let’s take an example, suppose if you go and put for argument’s sake Rs 10 lakh within a pension product today.  The agreement is that at the end 5-7-10 years or whenever you retire, you will be entitled to get a certain sum of money every month for life. When you receive this money, the entire amount that you receive is taxed in your hands. The reality of the matter is that the money that you are receiving is not only interest income, it is not income, it is also return of principle, because Rs 10 lakh which you have invested is coming back to you in the form of an annuity every month. But under the current tax clause, the entire amount gets taxed, so effectively you end up paying tax on your own principle. One has to wait and see how these issues are resolved particularly on the taxation front. But I think pension is very important. A pension product for an average middle-class Indian is so very, very critical and important. Q: Would you like to monetize the stake in the insurance JV once the hike in FDI is allowed? A: Standard Life has a right if they wish to increase their stake beyond the level at which they are now. Should they increase the limit, HDFC would have to sell some of our shares to them, but this would be at fair value. Whether it is in terms of HDFC selling shares, whether it is in terms of some amount of fresh capital in the company, that will be a function of how the growth is and whether the company requires capital or not.