Insurance Bill gives more power to regulator: Panel Member

A: If you look at the real objectives and the logic and rationale behind the increase in Foreign Direct Investment (FDI) it is really about bringing in more capital into the sector and therefore increasing insurance penetration and therefore giving consumers additional choice and competition. Now if you assume and if you start believing that that is the objective behind the increase in FDI clearly sale of shares by one shareholder to another shareholder which results in maybe gains to one shareholder vis-à-vis the other does not really meet the objective of penetration, expansion and consumer choice.

So, there was a fairly serious consensus within the committee that given the objectives that have been laid out for the increase in FDI that such a stipulation, such a directional queue to the government was necessary.

Q: Let me labour on this point because I understand and I know you have made this argument in the past that directionally this bill is pro consumer, it is pro choice and it should not result in Indian promoters being able to get windfall gains out of a secondary transaction but would you suggest or would you go as far as to recommend to the government that there be a mandatory ban on any secondary transaction?

A: The way this will work is that the committee has made its recommendations. The bill will be then introduced by the government in parliament and then the parliament will have a second bite at this in terms of a debate and if possible amendments.

I know for a fact that a lot of members of Parliament are quite clear that this bill and this increase in FDI should not be to allow a certain class of promoters to essentially gain windfall gains and profit by way of sale of shares and that is clearly not the objective of a legislation. Parliament cannot legislate to make people rich. Parliament can legislate to make consumers get additional choice and competition.

So, if that is the principle behind the bill I suspect that Parliament when the bill is debated a number of MPs will basically insist on may be further clarity and further mandatoriness about this but that is for the Parliament to decide at the time of the debate.

Q: Let me talk to you about the issue of control because the select panel says the term control should include the right to appoint a majority of directors, auto control the management or policy decisions included by a virtue of their shareholding or management right of shareholder’s agreement or voting agreements. Are we to understand then that that issue of Indian promoters necessarily having control is not what you recommend?

A: No, this comes from the fact that when you have the sectoral cap of 49 and this is in some ways linked to the debate on the composite cap versus separation of FII from the FDI that 49 percent sectoral cap implies that the sector requires Indian control and Indian management.

Now we have seen in the past in sectors like telecom how people gotten around it by creating proxy Indian shareholders and so on and there are two schools of thought on this issue. One is of course, the school which I belong to which says why should insurance have any restriction of Indian management and control. This is a consumer product, this is free competition etc. And then there is a school within the Select Committee and Parliament that says, no, this ought to be Indian controlled which is why we have the sectoral cap.

Be that as it may and that will get resolved during the debate in Parliament the one point that I have made repeatedly is that this cannot result in a situation where we have rent seeking where we have Indian so called promoters with 10-15 percent shareholding in a company that effectively control a company with 15 percent of equity because of this legislation. The legislation implies that if an Indian promoter wants to control this he has to invest 51 percent capital in it. So you can’t have at the same time as the government of India is trying to create investments in FDI into the country two classes of shareholders.

Q: Do you believe that you are going to be in the minority as far as this issue is concerned. How do you see parliament voting on this matter?

A: It is not the first time that I will be right and in the minority. So, I am not going to be too surprised by that. I genuinely believe India is at the cusp of something big. We can't afford to have two classes of shareholders. We can't have preferential rights for an Indian shareholder over a foreign shareholder. All shareholders must believe that they have equal rights under Company Law.

Where there is sectoral cap there should be a sectoral cap imposed on the amount of foreign equity and that is where it should end.

Q: I understand that few members expressed their reservations on the issue of empowering the central government to allow public sector general insurance companies to raise money from the markets but finally the panel has agreed with the governments stand in this regard as far as clause 109 is concerned. So, can we now see the government move towards general insurance PSU companies tapping the markets?

A: That the government will answer. The point here is that there is a reasonable consensus within parliament that the public sector companies in the insurance business must be strengthened, they must have adequate access to capital so that they are equally empowered to compete as the private companies beef up on capital from foreign sources. So, that issue whether that translates into more public market tapping by these PSUs or government capitalisation that is for the government to decide both politically and ideologically.

I want to tell you one more aspect of this Insurance Bill that may not have really been picked up. One of the things about this insurance bill is that there has been more and more empowerment of the insurance regulator and less and less hard coding into law. One of the problems with the previous laws of insurance has been that there has been everything coded into law including for example commissions for agents. This bill is really in my opinion a departure from the traditional way of putting everything into law and it moves to a place where there is part in law and a lot of empowerment of the insurance regulator to then create flexibility as markets and environments change by creating regulations.

Q: As far as health insurance is concerned you have retained the minimum cap at about Rs 100 crore. Do you believe that that could come in the way of health insurance penetration and secondly we have heard from all sorts of numbers coming in that we could see, Rs 20,000 crore odd, Rs 25,000 crore odd coming into the sector once this bill is actually passed by parliament overtime of course. What is your own sense?

A: On the first question this is little bit of a balance between the need to protect consumers from unscrupulous, fly by night health insurance providers versus creating a substantial entry barrier to real, credible providers and this at some point will be reviewed in the next couple of years to create more competition and more penetration in the health insurance space. So starting with Rs 100 crore is probably fine but it will need to be reviewed in the next couple of years to bring the threshold down so that there are more and more models including cooperative health insurance models where the threshold comes down to Rs 50 crore.

In terms of investment the real test of this is going to be the overall economic architecture that the government unveils going into the Budget. There is a lot of capital that is sitting on the threshold waiting to come in to India whether it is insurance or otherwise but what the government does over the next three months leading to the Budget in terms of unveiling the economic architecture, a more independent regulation, more transparent policy making and really put meat behind the minimum governance promise will really be the test of the tap turning on or off on the FDI flows into the insurance.