The private insurance promoters are happy at the prospect of the foreign equity component going up to 49 percent as recommended by a select committee of the Rajya Sabha, but they fear the proposed definition of the terms "Indian owned and controlled" may not enthuse foreign investors.
A select committee of the Rajya Sabha headed by BJP leader Chandan Mitra Wednesday tabled its report on insurance bill allowing the foreign direct investment (FDI) limit to be raised to 49 percent from the current 26 percent.
However, the committee recommended that the terms "Indian owned and controlled" be prescribed by the government.
The committee also said the law should have an explanation on what the term "control" actually means.
According to the committee, the term "control" shall include 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. The committee's definition of the term "control" has effectively shut the doors for foreign partners from running the show.
"The prescription suggested by the select committee, for enhancing FDI limit to 49 percent, with the addition of definition of 'control' would not inspire the confidence of foreign investors, as there is a catch in the definition of Indian insurance company," D. Varadarajan, Supreme Court advocate specialising in company/competition/insurance laws, told IANS over phone from New Delhi Friday.
"What is 'Indian owned and controlled' would ultimately depend on the rules made by the central government. The rule making weapon can be used as a sword or shield, as and when required by the central government, and, as such, foreign investors would not like to risk their investments in insurance ventures and remain as mute spectators," he added.
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According to Varadarajan, the central government may restrict the voting rights to the extent of 26 percent of the shareholding by foreign investors, which would act as the stumbling block.
There are 24 life and 28 non-life insurance companies in India and several of them are run by the foreign promoters with just 26 percent stake.
It is unclear whether the proposed law would be applicable to those insurers where the foreign partner running the show with 26 percent or less is not willing to increase the stakes.
To the question whether 'Indian Control' would apply to an insurer holding 26 per cent FDI presently and continuing to hold the same percentage or increases it slightly say by 0.5 per cent Varadarajan replied: "All these issues are in the realm of conjecture and would ultimately depend on the manner in which the definition of Indian insurance company is worded in the new insurance law."
"It is not clear whether the voting rights would be capped at 26 percent for foreign partner or they would have normal rights upto 26 percent and the remaining 23 percent would be subjected to differential voting rights," an industry official told IANS.
Terming the proposal that insurance companies should be managed and controlled by Indian owners, industry officials said it is best to leave the selection of the CEO/appointed actuary - Indian or foreigner - to the promoters. The government should not decide on that.
"What is so sacrosanct about the insurance sector when no such restrictions are there on other financial services sectors handling higher volume of monies," a senior official of a private life insurer told IANS.
According to industry experts around Rs.62,500 crore of fresh foreign fund is expected to come into life and non-life sectors when the foreign holding limits are hiked.
A senior official of a private life insurer told IANS that the sector would need around Rs.50,000 crore by 2020.
"The figure is based on the capital needs of the existing and the new players," he said. He said the capital needs of life insurers depends on their positing in the life cycle.
Companies that are over 10 years old may want to get their shares listed in bourses. Life insurers aged 10 years and less would need additional capital for their operations.