The select committee report on the insurance Bill, headed by Chandan Mitra, has been tabled in Rajya Sabha today. The draft report, among other things has recommended 49 percent composite FDI in insurance, suggested changes in definition of reinsurance, sought to define the term `control' in Insurance Act and proposed power to IRDA in formulating norms subject to acts and rules. The panel has accepted suggestions to the draft insurance bill made by Opposition Congress. Speaking about the bill to CNBC-TV18's Ekta Batra and Latha Venkatesh, Ashvin Parekh, Managing Partner of Ashvin Parekh Advisory Services says it is a long awaited and may go through if there aren't many dissents. He clarified that composite FDI includes FDI, FPI and NRI components as well. Former LIC chairman SB Mathur feels the bill, if it becomes a law in this session itself, will lead to many insurance companies becoming public by 2016.
Below is the transcript of Ashvin Parekh, SB Mathur and Sanjiv Bajaj\\'s interview with Anuj Singhal and Ekta Batra on CNBC-TV18. Ekta: Finally that day has come, give us a sense in terms of what you expect this select panel to possibly throw up and when would you see the bill see the light of day? Parekh: It is a long awaited bill now. The first draft was made in 2008 and then in 2014 we saw some more additions being made. Everything depends on the recommendations made by the committee and also the order of dessent. The larger parties in the Opposition have recommended that the amendment should have happened. If foreign investment in insurance sector is permitted to go up to 49 percent, then I suppose the order of dessent will decide. If we don’t have too much of dessent, then the Upper House may approve in which case it goes to the President for notification and it becomes an Act thereafter.
Ekta: There is that composite FDI which is now possibly going to be 49 percent according to select panel report. Your thoughts on it and what exactly does that composite 49 percent FDI entail? Parekh: It is composite foreign investment. What it would therefore mean is, as I understand, that it will have FDI as well as the FII components. So what it will mean is that 49 percent is not hard cast, it is left to the shareholders. For instance, if a foreign shareholder decides to keep his investment up to 26 percent then he may allow the Indian company to offer the rest of its equity to the market which then can be picked up by the FII. So I am personally very glad. I must say that these are very welcome suggestions. The matter of how much of within that 49 percent is FDI, how much of it is FII is entirely left to the shareholders. Each shareholder agreement, the way it has been drawn, will now decide, will now discuss about the entire thing. What worries me, however, is the definition of the Indian management control. That is something that we may have to examine the fine print basically.
Ekta: When you say definition of Indian management control and defining it in the fine print, what do you mean, what would be the cause for concern there? Parekh: The whole question is the class of equity that either the FIIs or the foreign investors will get. For instance, if we restrict the voting rights, that is a second class of equity that is required to be offered to the foreign investors then I suppose it would not be a complete reform. The valuation itself will suffer because equity with voting rights and equity without voting rights are two different things altogether. So that is one observation I am making. The second observation is it shouldn’t become a hindrance. So far we have seen that after almost about 58-59 partnerships that have happened, the foreign partners have worked very closely with the Indian partners, we haven’t had any dispute or any major issue in regards of the shareholder understanding. This creating a new class of equity could be a bit problematic. So I would say if Indian management control only keeps itself to 51 percent of equity, which the Indian shareholders put together could own then it is fine. Then the definition is a very workable definition.
Ekta: Coming back to composite FDI, I just wanted to get a sense, would it then mean that a couple of these insurance companies which are now subsidiaries of bigger companies would have to be hived off in order for them to take advantage? Parekh: That is going to be only one of the implications. I don’t think that is too much of an implication because all these investments made by the parent companies, in many cases it is conglomorates and also banking companies. These are investments, these are not subsidiary organisations as yet -- these are subsidiary organisations but in the books of banks, these are investments basically in the form of shares held in these entities. So I would say that by virtue of being a shareholder of a JV company, the person does not automatically become the shareholder of the bank. So I am not too much worried about the structure part but I am certainly concerned about the composite limit to the extent that if it was entirely FDI, which was the original reform, fortunately they have now changed it to composite limit. So in that regard, I would say it is a very welcome move. What will happen is if he had said that it was only going to be permissible by way of FDI that it would have created a deadlock situation. One shareholder has 49 percent the other shareholder has 51 percent, nobody will take the equity to the market unless both of them jointly agree to take it to the market. Latha: Do you expect in the next 18 months, somebody will come to the market? Parekh: This will certainly pave way for the Indian promoters. If I look at the life insurance sector particularly where huge amount of capital is required, I am seeing that at least four-five companies are almost ready to take the equity to the market. Their performance do show that they have started making profits and then there is no need for additional capital in these cases, so they can take it to the market. So I am certainly seeing that. Your point on price discoveries are very valid one. If let us say out of these first four-five, all of them have done extremely well in the last 12 years, they have built a good portfolio, a good life fund, they go to the market then we may get certain order of price and then it creates a market. It creates the market for the others also to follow in that particular area.
Latha: It now looks like when the Select Committee tabling its report in parliament it is only a matter of days before the cabinet approves it and tables the bill itself could happen in this session or most likely the bill becomes law in this session itself. How do you see the contents that are known so far?Mathur: I feel it is a welcome step. Foreign Direct Investment (FDI) if being raised to 49 percent would not have driven the valuation so much. We have seen in the said capital market it is the Foreign Institutional Investors (FIIs) who drive the valuation and to that extent Indian promoters should be thankful that the FII will be there to give them a good value for money, they have been kept invested for more than 10 years now. So, they will get good valuations.Number two I see it more as restoring the credibility of the country as a whole. We have been talking for the last 14 years even before this sector was opened up that it will be taken to 49. Successive governments have made this declaration and it is kind of we were losing acceptance that everybody is saying it should be 49 and they have not been able to do it. So to that extent I see it as a welcome measure.Secondly the other thing of the insurance bill which are very critical, one of them is section 45 which gives the insurer right to repudiate a policy in case a violation of claim. They were tinkering it, within Rajya Sabha presentations were made to the select committee that you are curbing policyholder’s rights and unnecessarily exposing them to risk, denial of a claim. So, it should not be done or it should be modified. I would love to see what the committee has recommended on that.So that is very critical because they were raising the period from two years i.e. the policy, if it is taken today if early claim happens within two years and there is deliberate non-disclosure the claim could be repudiated. Now the amended bill suggested that this period to be raised to three years instead of two years. So, instead of two years policy holders could repudiate up to three years and they had also included cases of involuntary nondisclosure i.e. I am not aware, I have made a wrong statement or I have conceded a fact which is not done deliberately. Even those cases are now covered which is a very dangerous trend because death claim settlement has to be very customer friendly.Latha: It looks sure shot that the winter session is going to see the passage of insurance bill. How do things change for you? In the next 18 months do we see you come to the market?A: Finally we are seeing light at the end of what was a very long tunnel but yes, I am hopeful now that this bill does get passed. We don’t as Bajaj Allianz need to go to the market. We have been building this business very gradually and profitably. So, we are adequately capitalised, but there will be many other companies that are in urgent need of capital and this bill once it becomes an act should end up benefitting them as well.
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