Why 49% FDI is still not good news for the insurance sector

The Indian promoters have to take a haircut since their companies have lost money from the time they were set up because of the losses those companies have incurred. It is a painful process and it has made life difficult in some of the largest insurance companies. Keki Mistry, CEO, HDFC and on the board of directors of HDFC Ergo, said that the company “has the ability or the option and agreement to take the stake to 49 per cent based on the valuation which would be done by two independent valuers. My sense is that … the process may take a little while because these things take time, you have to revise shareholders agreement, look at valuation and all of that”.

This is where the problem simmers. If the foreign venture were to use the market route to bring additional capital, they would need some data on valuation. But to decide on the valuation the companies would have to agree for listing in the market. The chunk available for the Indian partners to offer would be only 2 per cent, if they wish to retain 51 per cent of holding with themselves. Anything more and the control would pass to the foreign venture just when the market is looking up, hardly an appetising idea. There is a possibility that some of the better performing companies could still pick up the gauntlet. But here it is the foreign investor which plays spoilsport. Some of them want the division to happen at the old valuation rates without the market coming into play.

The only way for the respective percentages to work and yet leave some gravy on the table for the Indian promoters was if the rules for valuation of the insurance companies were to be relaxed.

The most plausible way out this could happen would be for the Reserve Bank of India to offer a leeway for the Indian partner on the fair valuation rules. 

Source: The Indian Express