Jaitley favours reopening the issue
By Nantoo Banerjee
Gone Nina Radia, enters Murli Deora. Both lobbyists, with excellent connections with industry, media and the government. The two acquired limelight for their covert and overt lobbying for clients coinciding with the formation of new government at the centre. NRI businesswoman Radia went strong during the UPA. And, now former Congress minister and present Rajya Sabha member Murli Deora seems to be out to prove his skill in the job. Radia had reportedly lobbied for the Tatas in the telecom sector. Deora is batting for deep-pocket foreign insurers probably with an eye to benefit many Indian promoters, including the Ambanis, as well. Unlike Radia, Deora’s passion is politics. A former union cabinet minister in the Congress-led UPA government, he was a top dog in the Bombay Pradesh Congress Committee (BPCC). He can’t be suddenly lobbying for foreign minority joint venture partners in India’s insurance business for personal gains.
The suspicion is Deora may be speaking on behalf on his party which tried but failed to raise foreign holding in the insurance sector beyond the 26 per cent limit because of resistance from its own allies as also from opposition parties. If so, what puzzles one is the timing the Congress campaigner has chosen to get the sectoral FDI cap in insurance relaxed without even sparing the benefit of doubt about how BJP’s mind is engaged in this sphere. It is highly possible that BJP too is considering higher FDI control in insurance. Why then Congress, an inconsequential backbencher in the new 16th Lok Sabha, is trying to take the credit of any relaxation of the FDI cap in insurance by the BJP-led government at this juncture?
Is the Congress move is meant to send a message to ‘select’ stakeholders in the insurance business, to which the party might have earlier “commitment” higher foreign control but failed to deliver for internal and external opposition? Who are Deora and friends exactly lobbying for – majority Indian business partners or minority foreign equity investors? And, why? In fact, higher FDI in insurance will benefit both the parties.
Murli Deora in his letter to Finance Minister Arun Jaitley has asked to consider raising FDI in insurance to 74 per cent to boost foreign exchange reserves and increase insurance penetration. The letter to Jaitley from the former petroleum minister, who would be known forever for decontrolling diesel prices, said: “I am sure you will take up this issue urgently to increase the FDI into insurance companies from 26 per cent, which is one of the lowest in the world…. Given the passage of time, maturity of the insurance sector, emergence of strong insurance regulator IRDA and still low penetration of insurance, it is appropriate we consider the issue of higher FDI of 74 per cent in insurance… “He argued that higher FDI control in insurance was much needed to bring in capital, increase industry’s competitive levels and to help bring in the vision of providing universal access and risk coverage to all segments.
Let us examine Deora’s arguments before the finance minister. During the previous government, it was estimated that 49 per cent FDI in insurance could bring foreign investment of $10 billion in the near term. However, these estimates have little realistic substance. The FDI inflow into India’s top 10 private insurance companies over the last 10 years has been less than $800 million. These companies are: PNB Met, Aviva, HDFC Standard, Birla Sunlife, Tata AIG, Max Life, Bharti AXA, ING Life, Future Generali and ICICI Prudential. Going by the average net asset value (NAV) of the shares of these companies, the additional foreign investment in these companies in normal circumstances through the equity expansion route may come to only around $2 billion to raise the overseas control to 76 per cent. Therefore, higher FDI in insurance will not open Pandora’s Box of foreign investment as it is suggested by Deora.
The financial sector, including banking and insurance, is not as equity-propped as the manufacturing and infrastructure sectors. Insurance business is run with policy subscribers’ funds. Small initial investments are needed to build the office infrastructure, publicity and physical network, which may be funded through both equity and loan. Insurance agents’ income is linked with the policy subscriptions they are able to raise. The practice lessens the burden of an insurance company’s annual outgo on salaries of employees. The business is more technique and innovative product-idea backed than high-technology and capital-driven. The technique is all about attracting the imagination of policy holders, often with false assurances on return as is in the case of most unit-linked pension plans. Conversely, foreign control in the insurance sector will provide a free hand to overseas operators in the fast expanding business in India which they are unable to tap due to myopic view of the business of most majority Indian partners.
The government did not seem to apply its mind properly when the sector was opened to FDI only to the extent of 26 per cent equity participation. Or, It might have done deliberately as it did in several other sectors, including pharma and telecom, to enrich chosen Indian private promoters in due course as the government relaxes the foreign control regime from 26 per cent to 49 per cent or to 74 – 100 per cent helping local promoters make windfall by offloading their stakes to respective foreign partners. The 26 per cent FDI in various so-called restrictive sectors was a post-reform Congress government invention with a dubious intention that encouraged poor corporate governance and massive corruption as witnessed in the telecom sector. Few foreign equity investors would like to do business in another country with only 26 per cent stake unless it is assured that the overseas holding restrictions will be gradually lifted. Even in such circumstances, the foreign investor should be ideally asked to start the enterprise by holding 100 per cent and then reduce the stake to 26 per cent or whatever through the stock market route making a public offering within a time frame. This would ensure governance, prevent corrupt practices on the part of promoters and benefit ordinary shareholders or the market.
In fact, Deora’s pleading for 76 per cent FDI in insurance may mean a windfall for Indian promoters, offloading their stakes at huge privately, as also secretly, negotiated premiums. India’s insurance industry consists of 51 companies of which 24 are in life insurance business and 27 in non-life spheres. Among the life insurers, Life Insurance Corporation (LIC) is the sole public sector company. Among the non-life insurers, there are six public sector insurers. In addition, there is a sole national re-insurer, the General Insurance Corporation of India. Other stakeholders in Indian Insurance market include agents (individual and corporate), brokers, surveyors and third party administrators servicing health insurance claims. The business has increased exponentially since the government allowed private entry 14 years ago. In the life insurance sector alone, the gross premium collection by the players, including LIC, rose from Rs. 35,000 crore to over Rs. 300,000 crore. The Congress-led UPA government had from the very beginning wanted to raise FDI in insurance. It could not be done in UPA I due to opposition from the Left allies. In UPA II, Trinamool Congress was against it. (IPA Service)