The select panel on insurance has tabled its report in the Rajya Sabha today.
Insurance Bill is ready to see the light of day. The select panel on insurance has tabled its report in the Rajya Sabha today. The draft report, among other things, recommends a composite cap of 49 percent, which should include all foreign investment and foreign portfolio investment. The committee is also of the view that incremental equity should “ideally” be used for expansion of capital base i.e to go from 26 percent to 40 percent there should be fresh capital infusion .
Will these caveats hurt foreign investors in insurance? Shashwat Sharma, Partner, Management Consulting at KPMG and Abizer Diwanji of EY, discuss on the issue.
Below is the transcript of Shashwat Sharma and Abizer Diwanji's interview with CNBC-TV18's Menaka Doshi and Senthil Chengalvarayan.
Menaka: The committee seems to have recommended that ideally any move up from 26 percent to 49 percent should only be via fresh capital. The notion is idealistic but what does it mean for those joint ventures that already exist right now?
Sharma: The point is very clear in terms of the existing joint ventures. With fresh capital being infused in the country the need for growth capital, the need for setting up new channels of distribution for being able to penetrate much deeper beyond the top 25-30 cities as of now that is going to be given a real impetus with the guidelines.
At KPMG, we estimate over Rs 20,000 crore entering the market if we were to look at fresh capital coming into the country in the insurance business, across both life and general insurance, including health.
Senthil: Will it make some of these companies overcapitalised given the current state of the business? If it is going to make them overcapitalised will the money come in at all?
Sharma: Each company has to think through a very different strategy. As we are aware there are close to around 45 companies across both life and non-life who would be impacted with the FDI regulation going up. In that context each company has to take its own view in terms of would the foreign shareholder who is the current joint venture partner increase the stake to 49 percent or would they want to bring in FII money or the FPI money or would they want to go public in the near future and be able to raise the money in the capital markets and also get the FIIs to come in. I think that strategy has to be very specific on a case to case basis.
So, I would say at a very generic industry level it would definitely help new capital, growth capital. Also 1.2 note is that some of the new players who have just entered the market or are looking to enter the market, some of those players need significant capital over the next 5-7 years. There are also lot of new players who are still waiting in the anvil to see when they should enter the market. Those players bringing in fresh capital along with other players who have recently wanting to expand but were strained and constrained by the capital would be really good. Also point to note is the new guidelines we need to wait for the final guidelines to be tabled and be passed by Rajya Sabha. They are also talking about health insurance companies needing only Rs 50 crore of capital rather than Rs 100 crore for life and general, if that happens I see lot of new health insurance companies coming to India in a very big way.
So, all of that would be very positive from an overall capital being infused in the country and infused in the insurance sector.
Menaka: Would it be fair for me to say that several foreign partners might not be very delighted by this caveat that any raising of the limit on increased investment would have to be via fresh capital because many of them have already indirectly funded these ventures through the domestic partners on the premise that when the FDI cap is raised or when the limit is raised that funding will get converted into equity to represent their increase stake in the business?
Diwanji: Not only the foreign guys but even the domestic guys. I think fore everybody there were structures that were existent, there were structures which have been approved by the IRDA itself and many of them envisage a secondary transaction.
Menaka: When you secondary you mean that the domestic partner selling equity to the foreign partner not an issuance of fresh equity by the joint venture company?
Diwanji: That is correct. So, lot of the transactions were based on the premise that there would be a secondary transaction and that would be now difficult to execute. Of course there would be ways to infuse fresh capital and do some kind of a buyback, there could be various other means by which people would do it. I think the moot point to understand here is that any kind of capital that needs to flow in to a company cannot be dictated by a particular amendment. So, the large point here would be that they should allow companies to take their own capital decisions irrespective of whether a domestic partner has to be paid through a secondary mode or no. If an insurance company needs capital it will find ways of getting capital. There are many businesses who have very high solvency ratios and hence don’t need capital. There are many others who absolutely need capital and in which case they will do primary.
Menaka: Even the negative impact on the domestic partner as you are pointing out is actually a negative impact on the foreign partner because if I am correct and this is anecdotal research, many of the domestic partners were bringing in capital based on indirect funding from the foreign partner. So, it is the foreign partners money at work. If the domestic partner is not able to exit via secondary transaction then it is actually the foreign partners money that is stuck, right?
Diwanji: You may be right, that is anecdotal because that is not evident.
Menaka: Is it not evident in the transactions or the agreements that you have witnessed?
Diwanji: There are many kind of agreements that are in place. A lot of people who have invested their capital need an exit. Even the domestic guys have been here for 7-8 years in this business and they may need an exit.
Menaka: May be the only way to do that exit is an IPO then because that seems to be the only option on the table or find other domestic investors or private equity funds or long only funds. For instance FPI wanting to invest in unlisted joint ventures, that is possible but with a bunch of restrictions, right?
Diwanji: Absolutely. My larger point was that you should not have any restrictions on funds coming in through a bill. Let the funds come in freely and capital if required will come in even on a primary basis and if not required will go out in some other form even if it comes in primary way.
Menaka: Do you see any of the structuring pain point proving to be a big substantive deterrent to foreign players?
Sharma: What we really need to understand is that where is the insurance sector at this point in time. I would say the answer may be different in the context of each company as well as in the context of each line of business. For example if you look at the health insurance side or if you look at high growth which we are seeing on the motor insurance side and also on parts of the life insurance, I think from an overall perspective of India and if you look at a much bigger macro economic view of the country we are grossly under penetrated, there is hardly any protection in the informal sector. So, we need to think beyond just the interest of a few companies in the insurance space and take a little large view.
Menaka: But they are the ones who run the business. If they are not comfortable with the structures then any potential of bringing more money in is timid to some extent.
Sharma: The point to not is that whenever any corporate or any company enters into the insurance business and I work with a lot of them on the business strategies for them you always take a outlook of minimum 10-15 years. So, if the idea is that you are looking at 10-15 year view and you are saying for 10-15 years the company will drive its strategy to increase penetration to reach a much wider base of customers. The metric of return on equity is very important. I take your point in terms of what the investors expect but that is value which is locked in the company. So, the point I am making is that if after 15-16 years we have an IPO and we are able to unlock it that’s great but the point is that you are still retaining significant value in the company.
So, if you look at the RoEs and this is all in the public domain from IRDA and other websites, most of the non life companies are in the high 20s in terms of RoEs which I think is a very good return for any investor. So, if you look at almost every large insurance company the RoEs are upward of 25 percent. If you look at the values and the market cap and if you look at the Indian shareholding – this morning I was in another channel which was actually tracking the stock price of some of the large Indian groups which hold equity in life insurance companies almost all of them are seeing a boom in the markets. So, there are lot of other factors that need to be considered.
So, I would not look at only structure as a constraint. That is the view we have.
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