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FDI in insurance — to hike or not to hike?

By Deepak Yohannan
July 10, 2012

(The views expressed in this column are the author’s own and do not represent those of Reuters)

FDI in insurance might just be increased to 49 pct. This sounds way too familiar and has been the situation for quite a long time now. Or we could do some scenario building and even see it being delayed by a few more years.

Now, given what is being played out, it wouldn’t have been a bad idea if some 10 years ago a host of Indian companies had resorted to “beg and borrow” and raised capital to set up insurance companies. If they had done the same and survived for 10 years (maybe even less), they could even sell their 26 pct stake at some handsome valuation today. They would not have had to worry about the 26 pct clause too much.

It would have been such a competitive advantage. While the rest of the industry is struggling to stay afloat, you could just focus on growth without too much competition.

So was it the lack of capital 10 years ago which prevented Indian companies from doing so? Or was it the lack of expertise and the need to have a strong global player as their partner? Reliance for one went solo and reaped rich rewards, at least financially and now has a strong global partner. And when the 26 pct clause goes up to maybe 49 pct, they could probably encash more.

Is the 26 pct clause actually working in the foreign partners’ favour? That is, in case they have the patience to live out the uncertainty phase. This business will need capital and big capital it has to be. India is still a very attractive insurance market with a long-term growth potential. As and when the uncertainty clears off, the urgent need for capital will give the upper hand to the partner who can actually pump in money on demand.

It is tough to get answers for this unless you are the Indian investor holding 74 pct and without too much cash for further investments. In the current scenario, even if the foreign partner brings in money, the Indian partner has to pump in thrice of what the foreign partner does. And if the hope of upward revision of 26 pct looks plausible, everyone would want to wait before adding any more capital.

For a country like India, just one big life insurance company is not a good idea. There is phenomenal potential in the market and unfortunately because of the nature of the business, large capital investments are required and will be needed in future also to build scale in a large country like India. It’s a strange scenario being played out with not much clarity on which way things will go — and that’s not a great position to be in.

For more articles by Deepak Yohannan, please visit MyInsuranceClub.com

You may write to the author at Deepak@myinsuranceclub.com

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