 "Insurers go back to the drawing board")
Insurance companies with foreign partners have gone back to the drawing board since the passage of the Insurance (Amendment) Act, 2015. "There are increasing requests to provide an opinion on how things will change now," says Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services LLP.
Five weeks ago when the bill was passed allowing 49 per cent foreign direct investment in the sector, many insurance companies such as Bharti Enterprises, Max India and Reliance Capital indicated that their overseas partners intended to increase their stakes.
But things aren't so simple. As the fine print is sinking in, there are several concerns. For starters, with the government being firm on the 'Indian management control' clause, it means that the insurance company would be managed and controlled by the Indian shareholders despite the foreign shareholder having 49 per cent stake - a bother for most players.
According to the FDI definitions applicable in India, 'control' includes the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders' agreements or voting agreements.
No clarity
At present, there is confusion on what the term 'Indian management' means. Some insurers are of the view that this would include only the chief executive. However, others say that this would also include chief financial officer, as well as the heads of the underwriting and actuarial functions. Legal experts say the term 'control' would mean the Indian entity holding more than 50 per cent. However, what is not clear is whether control would mean control on voting decisions.
In addition, there isn't clarity over how many board members can be appointed by the foreign partner or whether they have to be of Indian origin or not. "While the Indian management clause has to be mandatorily included, the versions in each deal will be different because foreign partners do not want to be denied of voting rights," says the chief executive of a life insurance company.
Problems will be worse for joint ventures which are complicated, like Star Union Daiichi Life Insurance in which Bank of India has 51 per cent, Japan's Daiichi has 26 per cent and Union Bank of India has 23 per cent. Then, there are cases like PNB MetLife in which Punjab National Bank has 30 per cent, MetLife has 26 per cent and others like Jammu & Kashmir Bank hold the rest.
Another key problem is the fair pricing regulations, which may affect players like Bajaj Allianz that had agreed upon a certain price with its partner. According to Parekh, when the initial agreements were signed, many domestic banks or non-banking financial companies were just financial investors because they lacked the wherewithal to do risk management and underwriting - something the foreign player was equipped to do.
While things have changed substantially in the past 15 years, many domestic partners have continued to be simply investors. In such a situation, the foreign partner may not be too happy paying extra if the business has grown. A management consultant says: "There are companies in which partners are seeking a higher price for stake increase now. This is leading to problems with some joint ventures."
The fine print
But the latest issue which will change the things substantially is the Insurance Regulatory & Development Authority of India (IRDAI)'s latest guidelines which ask bank-led insurers to sell products of a maximum of three companies. While the final guidelines are yet to come, because the insurance regulator has given time till April 24 for comments, bank heads feel that it will be a major dampener. "For big public and private sector banks, it will be a serious valuation hit if these guidelines are implemented. Due to this many foreign partners have decided to wait before they commit more money into their Indian ventures," says the head of a private sector insurance company.
IRDAI in its exposure draft on licensing of corporate agents has said that no corporate agent can get more than 90 per cent business from one insurer in life, non-life or health in its first year of operation.
According to present laws, corporate agents (like banks and non-banking finance companies) are allowed to tie-up with only one life insurer, one non-life insurer and one standalone health insurer.
The regulator has mandated that not more than 75 per cent of the premium shall be placed with any one insurer in the second year and not more than 60 per cent of the premium can be placed with any one insurer in the third year of their operations. From the fourth year onwards, no corporate agent shall place more than 50 per cent of their business as specified above, with any one insurer.
Five weeks ago when the bill was passed allowing 49 per cent foreign direct investment in the sector, many insurance companies such as Bharti Enterprises, Max India and Reliance Capital indicated that their overseas partners intended to increase their stakes.
But things aren't so simple. As the fine print is sinking in, there are several concerns. For starters, with the government being firm on the 'Indian management control' clause, it means that the insurance company would be managed and controlled by the Indian shareholders despite the foreign shareholder having 49 per cent stake - a bother for most players.
According to the FDI definitions applicable in India, 'control' includes the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders' agreements or voting agreements.
| CHANGE OF PLANS Some key joint ventures that could need re-drafting |
HDFC Life
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No clarity
At present, there is confusion on what the term 'Indian management' means. Some insurers are of the view that this would include only the chief executive. However, others say that this would also include chief financial officer, as well as the heads of the underwriting and actuarial functions. Legal experts say the term 'control' would mean the Indian entity holding more than 50 per cent. However, what is not clear is whether control would mean control on voting decisions.
In addition, there isn't clarity over how many board members can be appointed by the foreign partner or whether they have to be of Indian origin or not. "While the Indian management clause has to be mandatorily included, the versions in each deal will be different because foreign partners do not want to be denied of voting rights," says the chief executive of a life insurance company.
Problems will be worse for joint ventures which are complicated, like Star Union Daiichi Life Insurance in which Bank of India has 51 per cent, Japan's Daiichi has 26 per cent and Union Bank of India has 23 per cent. Then, there are cases like PNB MetLife in which Punjab National Bank has 30 per cent, MetLife has 26 per cent and others like Jammu & Kashmir Bank hold the rest.
Another key problem is the fair pricing regulations, which may affect players like Bajaj Allianz that had agreed upon a certain price with its partner. According to Parekh, when the initial agreements were signed, many domestic banks or non-banking financial companies were just financial investors because they lacked the wherewithal to do risk management and underwriting - something the foreign player was equipped to do.
While things have changed substantially in the past 15 years, many domestic partners have continued to be simply investors. In such a situation, the foreign partner may not be too happy paying extra if the business has grown. A management consultant says: "There are companies in which partners are seeking a higher price for stake increase now. This is leading to problems with some joint ventures."
The fine print
But the latest issue which will change the things substantially is the Insurance Regulatory & Development Authority of India (IRDAI)'s latest guidelines which ask bank-led insurers to sell products of a maximum of three companies. While the final guidelines are yet to come, because the insurance regulator has given time till April 24 for comments, bank heads feel that it will be a major dampener. "For big public and private sector banks, it will be a serious valuation hit if these guidelines are implemented. Due to this many foreign partners have decided to wait before they commit more money into their Indian ventures," says the head of a private sector insurance company.
IRDAI in its exposure draft on licensing of corporate agents has said that no corporate agent can get more than 90 per cent business from one insurer in life, non-life or health in its first year of operation.
According to present laws, corporate agents (like banks and non-banking finance companies) are allowed to tie-up with only one life insurer, one non-life insurer and one standalone health insurer.
The regulator has mandated that not more than 75 per cent of the premium shall be placed with any one insurer in the second year and not more than 60 per cent of the premium can be placed with any one insurer in the third year of their operations. From the fourth year onwards, no corporate agent shall place more than 50 per cent of their business as specified above, with any one insurer.