FDI IN INSURANCE
FDI IN INSURANCE
The government has raised long awaited FDI in insurance from 26% to 49% in the Union Budget 2014- 15. It is expected that the government wants to promote “FDI” selectively. The proposal is pending since 2008. The increase in the FDI limit to 49% would certainly help domestic insurance firms to get access to the much needed capital from its overseas partners. This is the big positive & stocks like , Max India, Bajaj Finserve , Exide industry Aditya Birla Nuvo is like to get benefited.
With this, lets understand the impact on longer term perspective.
As per Harsha Kapoor, Managing Partner – Avizare Solutions,) FDI Will make the Indian Insurance sector more vibrant and dynamic in the intermediate and long term. Insurance companies and other players have to gear-up and plan now to reap the future benefits. They have prepared an excellent fundamental report ( Pl do read it in link / URL below mentioned as reff)-
Longer term Growth Driver
1) Rising income & growth of middle class
2) Financial Sophistication
3) Societal changes and urbanization
Focus of Insurance will shift to –
- Shift focus to untapped markets
- innovate on products and services
- Strengthen risk management practices
- Achieve operational efficiency
Foreign Partner will have first right of refusal
Another issue that the Government’s decision to increase Foreign Direct Investment ( FDI) cap in the insurance sector to 49% could reopen the prickly issue of pricing the additional 23% stake sale to the foreign partner. The much needed increase will like to t open gate. Most insurance joint ventures (Like SBI life , HDFC life etc) have given its alliance partner “the right of first refusal” rights to buy additional stake. This includes, company like like SBI Life and HDFC Life etc. As per HDFC Standard life, the first right to buy stake for at market price is with Standard life, if limits are raised.
Several companies had entered into an agreement where the equity stake would be transferred at a price based on a pre-determined rate of return. The agreement has two purposes 1) they ensured that the Indian partner was not exposed to risk 2) it allowed (already) the foreign buyer to increase the stake with (may be) a nominal amount even though business valuation have risen considerably. So stake sales at market price or fair value are not an issue. With a call option in place (with foreign partner), the most of the funding for the expansion of business may came from the foreign partner itself (by buying equity shares at a huge premium.)
But same may not always be the case. In case of Bajaj Allianz Life Insurance, they have reserves and surplus amounted to Rs 4,811 crore. This kind of company may not require fresh round of funding. But, while speaking to TOI, Sanjiv Bajaj (MD, Bajaj Finance) said that “the companies did not need any more capital and Bajaj Finserv would book profit on selling shares to Allianz at market prices” Bajaj Auto had disclosed that it had received a ‘premium’ from Allianz”. In 2001, when Bajaj entered into two joint ventures agreement (JV) with Allianz, & gave the Allanz an option to hike stake up to 76% in the life and 50% in the non-life insurance venture.
An interesting days ahead for Insurance stocks. We will shortly come-out with stocks specific report for our Long term investor. Though, there may be short term play, but the real benefits will , surely, come over longer term.
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