Published on : May 26, 2015
In a mandate issued by the Insurance Regulatory and Development Authority of India, there need to be a minimum of 26% equity holding by the Indian promoter in any insurance joint ventures. This is to deter the local investor from using foreign investment liberally and dilute accountability through listing policy. In case an insurance company goes for listing, this would help in decreasing the dependence of the management on foreign company. The mandate clearly states that Indian investors will not hold more than 25% of the share capital jointly.
IRDA hopes that the move will help to control transfer and dilute ownership in insurance companies. It aims to emulate the Reserve Bank of India, which prevents the investors from flipping investments for short term gains. According to the mandate, a single entity or group of investors can hold up to 10% equity capital in an insurance company. The government has started to list some of the state-owned general insurance companies. HDFC Life would probably be the first among the insurance companies to list its shares.
However, industry analysts point out that restricting a single Indian investor’s shareholding to 10% and offering single foreign investor to hold 26% under the automatic route and 49% under the government approved route, the industry regulator is restricting the growth of the insurance sector in the country. This may adversely affect domestic and foreign investments in the insurance companies in future. As the foreign investment limit rises, the bigger enterprises are expected to partially monetize the holdings in their life insurance businesses. According to a report by Kotak Institutional Equities, if five top industry players reduce their stakes to 51%, it would lead to capital gains of Rs 20,000 crore.