Foreign stake in insurance JVs to rise

FOREIGN DIRECT INVESTMENT/ Higher shareholding limit in aviation will benefit low-cost airlines

Foreign insurance companies to rush in following FDI hike in the sector.

The US-based Metlife will be raising its stake in its Indian joint venture Metlife India to 49 per cent. Venkatesh Mysore, managing director, Metlife India said this would help hasten growth and provide greater product innovations.

Metlife won't be alone. Virtually every foreign insurance company (Prudential, Sunlife, Old Mutual and AIG) will be raising its stake to 49 per cent. Shika Sharma, managing director, ICICI-Prudential Life said that ICICI Bank would retain 51 per cent and unload the rest to Prudential.

Also, more foreign insurance companies will enter India. "Raising the equity cap will bring more money into the country, and will also help expand the industry," said Stuart Purdy, managing director, Aviva Life Insurance.

Currently the total capitalisation of private life insurance companies is Rs 3,179 crore, of which only Rs 827 crore is by way of foreign direct investment (FDI).

Most of the additional money that will come in may not be infused into the insurance entity because the Indian promoters will offload 23 per cent in favour of their foreign partners, said Sunil Mehta, country head and chief executive, AIG.

All this is the outcome of finance minister P Chidambaram's proposal to raise the FDI cap in insurance from 26 per cent to 49 per cent, in telecom from 49 per cent to 74 per cent and in civil aviation from 40 per cent to 49 per cent.

In telecom, the announcement is expected to consolidation, apart from more overseas funds flowing in, leading in turn to an expansion of telecom services and networks.

"There will be several permutations and combinations in the shareholding patterns of telecos and one might find a few Indian players exiting the market," the head of a foreign investment bank in India said.

Munesh Khanna, managing director, NM Rothschild & Sons (India) Pvt Ltd, said: "The policy has changed the telecom industry's dynamics. We will see consolidation in the market."

Sanjay Mehta, telecom industry leader at Ernst & Young, said that the higher FDI limit would encourage foreign investors to invest directly.

Still, telecom IPOs won't be shelved because of the policy change. Vikas Saraf, CEO, Essar Teleholdings, a partner of Hutchison Essar, said, "The company will still go ahead with its IPO plans later this year."

The higher FDI in civil aviation could aid existing private airlines that are seeking to expand operations. Saroj Datta, executive director, Jet Airways, declined to comment on the implications for Jet.

The higher FDI is also expected to throw a lifeline to low-cost airlines (though the tax on leasing aircraft could hit them badly).

Said Ranjit Malkani, chairman & CEO of Kuoni Travel group India, "This is likely to bring in greater foreign investment that will benefit a host of low cost carriers that are about to enter India. Overall, we can expect at least a five fold increase in capacities because of these low cost carriers."