Column : Does the FII route make sense?

Dec 12 2012, 01:11 IST
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SummaryBy allowing FIIs to invest 23% instead of raising FDI cap to 49% compromises economic interests of all foreign insurers.

times book value at a minimum.

The tiering problem (that has arisen inadvertently) of there now being two classes of private insurance JVs in India (i.e. early entrants that are profitable versus late entrants who will not be profitable for some time) introduces a major element of unfairness into the system by introducing the forced entry of FIIs into insurance JV shareholdings well before IPOs can be contemplated.

This proposal will defeat the stated intent of MoF/GoI to increase confidence on the part of the foreign investment community by rewarding (speculative?) FIIs and discriminating against serious long-term FDI investors like insurance companies and pension funds. It will have the opposite effect from that intended by damaging rather than enhancing India’s image in the foreign investment community. It will create the opportunity for unfair (possibly illegitimate) windfall gains for round-tripped domestic capital via the FII route into domestic JVs that are close to launching IPOs.

The JV agreements that foreign insurers have with their domestic partners (all approved by IRDA), reflect clearly the intent of every foreign partner to hold 49% of the equity in the JV as soon as the rules so allow. Foreign insurers expected the FDI cap to be lifted within 5-6 years of entry. They felt encouraged when the cap was abolished for investment banks and asset management companies (integrally associated with the insurance business) within five years of their entry.

So, if asset management companies, investment banks and foreign commercial banks can be 100% foreign owned in India, why should only the insurance segment of the financial services industry be subject to unjustifiable discriminatory treatment in terms of FDI limits? Is the intent to protect the LIC and other public insurers? Is that good for the Indian consumer of insurance? If not what will be achieved?

What is to be gained by encouraging FII investment and discouraging FDI investment in a long-term industry with a 30-40 year business horizon like insurance, when every Indian government has wanted to achieve precisely the opposite? Are we now saying we now prefer FII to FDI after complaining that FII investment is hot and volatile while FDI is cold and permanent? If so why?

The FDI cap for insurance companies in India is the lowest in the world. Most Asian countries have caps of 51% (e.g. China) with Indonesia and Malaysia having higher caps and many permitting 100% FDI. What is so different about India that

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