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Last Updated : Dec 24, 2014 09:58 PM IST | Source: CNBC-TV18

Cabinet approves ordinance on Coal, Insurance Bill

Earlier, an ordinance on coal was introduced on October 20 after the Supreme Court scrapped over 200 coal block allocations. It was valid till the January 4 as the life-span of an ordinance is only six weeks since the inception of a Parliament session.


Devika Ghosh
Moneycontrol.com


As expected the Cabinet has approved ordinance on Insurance Bill and Coal. With Coal Mines Bill yet to be cleared by Parliament, the government approved re-promulgation of an Ordinance to facilitate e-auction of coal blocks for private companies for captive use and allot mines directly to state and central PSUs.


Earlier, an ordinance on coal was introduced on October 20 after the Supreme Court scrapped 204 coal block allocations. It was valid till January 4 as the life-span of an ordinance is only six weeks since the inception of a Parliament session. The re-promulgation of the Ordinance will enable the Coal Ministry to go ahead with its decision to give a total 101 mines, including 65 through auction, in the first phase. Of the 101 blocks to be allotted and auctioned in the first lot, 63 mines would be given to the power sector, while the rest would be for sectors like steel and cement.

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The Insurance Bill on the other hand has been pending with the Rajya Sabha since 2008. It seeks to increase the composite foreign investment limit in insurance companies to 49 percent from current 26 percent. The 49 percent cap would be for both FDI and foreign portfolio investments.


Reacting to the news, Rajesh Sud, MD & CEO of Max Life Insurance says the ordinances indicate firm resolve on the government's part. However, foreign investors will view this tentatively until a Bill is passed, he adds.


An ordinance is an interim measure, a statement of intent on the part of the government. The government has six weeks after an ordinance is passed to get approval from both the houses and pass the Bill or let it lapse - after the first sitting of the Parliament.


Sud believes that the domestic ownership clause in the insurance bill will have only company-specific ramifications.


The Cabinet has also cleared formula for coal block auction floor/ reserve price. The first tranche of bid documents on coal block auction will be released on December 27.


GD Mundra, director, Sarda Energy says he is happy that the government is working or moving so fast. The parliament session got over yesterday and today the ordinance was passed. The government is moving toward completing the coal block auction process for which the deadline has been set as March 31 by the Supreme Court.


SB Mathur, former LIC chairman says more than FDI, there are many important clauses in the Insurance Bill, which would give a fillip to the insurance industry.


Atanu Sen, former managing director and CEO, SBI Life Insurance says as far as foreign investors are concerned, they will be looking to see whether the government will manage to pass the Bill anytime soon and only then invest. But till that time, they will be on wait and watch mode.


Khushroo Panthaky, Partner, Walker Chandiok & Co LLP believes the ordinance in itself may not be very fruitful. “I would not expect significant amount of inflow coming into this particular sector until the bill is approved by both the houses of the Parliament,” he adds.

Meanwhile, former coal secretary PC Parakh does not see prices going sky high. In fact, he believes that government may get more money than CAG’s calculations, as auctions are bound to be successful due to shortage of coal. Furtermore, he feels reverse bidding will give companies an opportunity to retain their blocks.


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Below is the verbatim transcript of Atanu Sen, SB Mathur, Rajesh Sud, Santosh Kamath's and Khushroo Panthaky's interview on CNBC-TV18


Ekta: Would your sense be that we have seen the Azim Premji trust invest around 1 percent in HDFC Life Insurance and now the opinion is that domestic investors also might be interested in the insurance space and valuations are looking at much more of a premium as opposed to earlier estimated. Do you think that the focus will now shift towards domestic investors as opposed to just FDI and FII and that is just one part of the game?


Sen: You are absolutely right, in HDFC also the Azim Premji trust invested nearly 1 percent, 0.92 percent to be precise and that gives a valuation of nearly Rs 20,000 crore to that company. There are similar companies in the country and it is not only the interest from FDIs and FIIs, it would also be an interest from domestic companies also to look into this space.


Ekta: Have valuations just increased for the insurance space on the basis that eventually we will see insurance become a law even though it is an ordinance at this point in time and there are group of investors maybe FDI and domestic who are now much more optimistic and that was ascertain by the fact that we saw around a 2.77 time embedded value for the Azim Premji trust deal with HDFC Life?


Mathur: We see some signs of revival and there is no reason why industry should not grow and become more profitable because we are vastly under penetrated. So, I see a lot of valuation improving and more expectation, more profitability in that industry.


Reema: An ordinance is passed for insurance, is this going to be a game changer and do you expect money to come through into any Indian company till this becomes a law?


Sud: The thing I would say about this is that I am hearing this for the first time from your channel itself so as far as I am concerned the ordinance maybe just indicates a very firm resolve on the government’s part to move ahead on some key decisions that have been in the domain for sometime. It has to go through the process of approval by the president and eventually ratification by the parliament. Until that happens, there would be a degree of tentativeness on the part of various stakeholders in this particular area to say that this is now clear enough for them to transact. So, that is my first view of this, obviously a lot depends on what is written in there and how it finally gets approved. Business and money always looks for stability and clarity, so, those are the two essentials for us to get to before we can say how will money flow.


Ekta: Can you give us a sense in terms of the valuation parameters now, has it changed even on the likelihood that eventually this ordinance will become a law for the insurance space? Are we seeing much more FDI interest or maybe higher valuations already?


Sud: I wouldn’t be able to comment on that; that is for the street and for financial analysts to comment on. However, the direction is more important.


Ekta: Even from FIIs, eventually if a company wants to go via an IPO route will you see much more FII interest as oppose to before?


Sud: Like I said any certainty of reform, of direction to industry in our case insurance industry would be very welcome. It is a positive development for the country and for the overall environment of the investment. So, that certainly is a plus if it goes through.


Ekta: Two questions from my side, is there uncertainty from FIIs and FDIs on the basis of say issues such as control remaining with the Indian management, something which a lot of experts told us is something that making FDIs apprehensive, so despite the ordinance, despite it becoming into law that would be a key deterrent for FDI investment?


Sud: This will be a very company specific and shareholder specific debate. We are completely Indian management; Indian controlled in that sense so to us it is really a non-issue. It will be very specific to companies where there is a desire on the part of the foreign holders to get more say in the management; maybe couple of those companies the stakeholders could have some anguish. However, I don’t think that is a general sense in the industry.


At a higher level more open regime of governance is always welcome so that there are no artificial barriers to getting the best management from wherever possible. However, other than that it is quite sensible, it is in the way life has been even in the Companies Act, wherever the statutes that they find control. So, I don’t think it is such a big deal for well run companies. At the end of the day, all stakeholders are interested in only one thing, business should do well and as long as you have a business that is doing well all stakeholders are happy.


Reema: What is the foreign investors take on valuations of Indian insurance companies because HDFC Life Insurance valuations which was higher than what the analyst community was expecting so are foreign investors okay with the valuations, the current valuations of the Indian insurance companies, or do you think that will be a deterrent?


Sud: The Indian market has always been held out as one with great potential. The various measures that have been used, GDP penetration, insurance premia or just the sheer number of people that we have in the relative under insurance that goes around the country. So, there are various things to believe that this is a high growth market, should develop into something very important and nice in the overall scheme of shareholders whether Indian or foreign. So, that long-term promise is quite visible and quite sustained.


Valuations as I keep saying are a matter of perception and every stakeholder to every buyer there is a seller. So, I guess it is something very hard to comment upon - what is fair value. The fairness is again in the eyes of the person who is doing the transaction. However, it is good news, at least there is heightened interest and people are getting a sense of potential here.


Ekta: Overall in terms of M&A we have seen some experts say that there could be USD 5 billion plus in terms of investments which could come in, in the next five years. In your sense how much of an M&A could we see in the insurance space in which sector Life or General and how much of an FII or FDI investment do you expect possibly in the next five years?

Sud: Not restricting it only to M&A but overall the expectation of inflows were in the range of about USD 3 billion as we estimated last. So, it still would stay anywhere between Rs 15,000-20,000 crore is what we should expect the inflows to be and this would come in a combination of FDI, FII and some of these M&A transactions that would be our expectation. I am speaking only for the Life business; I frankly would have very little visibility to the non Life side of it.

Sumaira: What are the areas you are watching out for?

Kamath: They have said it is going to be a two staged process. In the first stage which is the qualification stage there is going to be an indicative price bid which needs to be put in and the second stage is an e-auction. In the first stage they have said that the top 50 percent of the bidders on rank will be qualified and the best price would be the floor or the ceiling price depending on whether it is a regulated or the unregulated sector. There have been certain points raised on this and whether it is the top 50 percent or we are going to insure a certain minimum number of bidders to get qualified. For example if there are only say five bidders for a particular block are they still going to apply the 50 percent criteria or they going to let all five of them bid. So, that for example is one area.

The other point for the power sector is that they have said the power has to be tied up through long-term contract with a provision of maximum of 20 percent of the power capacity to be sold in the merchant market. Now, the key question here is that there are a lot of power plants which have not tied up their full capacity in long-term PPAs and what happens to those plants because the offtakers and the offtake arrangement is not entirely in their hands. So, it is the discoms which have to call for tender for long-term procurement and then these IPPs who are bidding need to get successful in those tenders. So, currently the reading of the draft document or the auction stays that you can’t have more than 20 percent merchant. So, that is another open area where there needs to some clarity on how they are going to treat those IPPs which are having more than 20 percent open. So, that is the other area I would say.

Apart from that the overall comment I would make is they need to ensure that there is sufficient indexation to these long-term coal production contracts especially for the power sector these long-term contracts are getting tied to the power tariff and if there is a variation in the coal production cost because end of the day these are long-term contracts, 25 years or 30 years production cost and as we have seen in the power sector PPAs where there are always external factors and it will not be possible to estimate. So, that is the point.


Q: Do you expect a significant inflow of capital and how significant is this ordinance currently?


Panthaky: This being an ordinance is not really the law of the land because the act has to be passed by both the houses of the parliament. Unfortunately, in this particular conclusion of the winter session the law could not be passed as a result this has to go through the ordinance.


Typically, if you look at the ordinance it shows the strength of the government that they have the confidence that things should go fine in the near future but an ordinance is an ordinance.


I, therefore, believe that I would not expect significant amount of inflow coming into this particular sector until such time that the bill is approved by both the houses of the parliament.


Q: How are foreign investors seeing this, USD 6-8 billion is what the finance minister has pegged this. Foreign investors have concerns and there have been issues with respect to regulatory concerns as well, what are foreign investors telling you?


Panthaky: Foreign investors believe that this is a good market. If you look at the insurable population versus the insured population we only have about 4 percent of the population in India which is being insured whereas there is major scope for the insurable population. So, India looks like a great market, a very big market where insurance is concerned.
 
There is a good scope for the existing players as well as new players to be a part of this. They are positive in terms of enhancing their stake in terms and having their shareholding to about 49 percent. At the same time there will be more new insurance players looking out for strong business houses in India which would be the JV partners for them in the new insurances businesses.

Foreign investors are very positive, they are seeing a good amount of potential. Over the last 14 years insurance businesses have been in the private sector, companies have started to make profits so they also believe that there would be return on capital as well. Therefore, it looks like a favourable decision.



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First Published on Dec 24, 2014 12:16 pm
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