'See $8-9bn cap infusion in 5yrs post insurance Bill nod'

Meanwhile, Hitesh Jain, Partner at ALMT Legal is confident of the hike in overseas investment limit attracting USD 8-9 billion over the next 5 years.

Going ahead, Standard Life may increase stake in HDFC Life while ERGO might also look to augment stake in HDFC ERGO.

Edited by: Monishi Parekh

Below is the edited transcript of Hitesh Jain and Amitabh Chaudhry’s interview:

Q: It is well known that several of the foreign entities had either given loans to the domestic partner to invest their portion of the equity, to bring in their portion of the equity. Some of them also had agreed that when the 49 percent limit would come in, they would be able to buy the shares of the domestic partner. We also know that a lot of domestic companies had nothing to do with insurance and therefore want to get out. So, do you think this additional capital requirement clause if is indeed law is actually going to make life difficult for both partners?

Chaudhry: There are number of agreements where the foreign partner has a right to take it to 49 percent. In many cases they actually run the joint venture, the Indian partner is more like a sleeping partner.

Now, with this increase in composite FDI to 49 percent, they will be able to increase their equity stake. However, then it brings a bit of a problem that they have said - the increase in FDI can only come at the cost of management control and they have defined it at least in the report as what that means. So, on one side you can increase, take higher stake, take higher economic interest but on the other side, there is an issue on the management control and how do you give it away when you have been running it for those many years.

Secondly, you mentioned that this increase in FDI is only on increase in share capital. The Select Committee has stated that ideally, they would like to see something like this; they will ideally like the increase in capital or the capital to come in the form of money coming into the insurance company itself. However, they have left the door open for sale of existing stakes also; at least that is the way I read it. I think that is what Chandan Mitra also said in an interview, which I saw yesterday night.

So, I think that door is open but you are absolutely right that on one side I am allowed to increase the stake to 49 percent and on the other side the management control issue needs to be sorted out. If the company is going public very soon then anyways some of these agreements will fall away but if the company cannot go public or does not intend to go public then this Indian management control issue does need to be sorted out between the two partners and it does creates a problem.

Q: How much of a deterrent this could be for the foreign player?

Jain: It will not be a deterrent because most of them have already invested in the JV, they have already come up to 26 percent. Either you will use the capital to buy the existing stake from the Indian entities or you are going to do the fresh infusion of the capital. For them, I don’t think that will be a major concern.

The concern as Amitabh rightly puts is going to be that after investing 49 percent whether they are going to get the managerial control over or at least they will be allowed to participate in the top management. Also, what we have to look at this is also from the FIPB approval perspective. So how is FIPB going to give an approval, are there going to be conditions that are going to be listed? One will have to look at the final prints in the eventual act that will be passed, the FIPB approval, the fact of the managerial control. So, all these factors in totality will have an impact and not just per se incremental issue of equity shares for increasing the capital base of the company.

Q: How will this pan out, does this entire thing become a non-starter with foreigners refusing to bite because they are actually going to lose even existing control?

Chaudhry: I think there are enough players where the foreign partners will immediately increase the stake. We are also one example where I am sure our foreign partner Standard Life would like to increase the stake and for them the fact that maybe so called management control might go away, I don’t think will be such a big issue.

There is a set of players where this would not be an issue. There will be another set of players, where the balance where this could be potentially an issue and they will work it out over a period of time. So, the foreign capital will come in and some of it will come in pretty quickly but also a pretty large portion of the capital might take some time to come in because as even Hitesh pointed out some of these rules need to be understood.

The Select Committee report doesn’t mention FIPB anywhere. So, I don’t know whether the rule remains or not. So, I don’t think it is a deterrent but for some it is a big issue to surmount because I am right now running the management of the company, I appoint everyone, I take care of everything which needs to be done with the company and suddenly I am told that if I increase equity stake everything will go away. So, I might as well stick to 26 percent and find some other ways and means of sharing the economic interest rather than necessarily through an increase in equity capital. So, we have to see how some of the foreign players who are actually running the companies manage this issue going forward.

Q: If you had to put a number to it, how much of fresh capital can we expect in the country say in the next couple of years?

Jain: We should look into the next five years close to USD 8-9 billion of capital, that is what is envisaged in the next five years. However, it will all depend upon the final print in the bill. However, the way one looks at the number and the way things are turning out one could positively see this amount of capital flowing into the country because if you know the market, the penetration is low, it can really expand, there is a requirement of capital base to expand the capital base to invest and other opportunities are there. So, you can look at like good capital coming in, in the next five years.