OPENING UP Higher insurance FDI may fetch $5bn

Mumbai: Increase in foreign investment limits in insurance could bring in $5.25 billion of foreign capital — almost thrice the money that has come in from foreign insurers in the decade since the sector was opened up. But if the relaxation is in the form of allowing investment by foreign institutional investors (FIIs), most companies may choose to list their subsidiaries rather than offer strategic stakes. 
    According to a report by Goldman Sachs on the Indian insurance sector, the total market valuation of private insurance companies was Rs 1.26 lakh crore. The total equity investment by foreign insurers till date was Rs 8,744 crore, or $1.7 billion. If one were to include the recent deal by Mitsui Sumitomo to buy out the 26% stake of New York Life in Max Life Insurance, the total foreign direct investment (FDI) amounts to $1.9 billion. 
    "A 23% FDI/FII investment could potentially lead to foreign inflows of $5.3 billion based on FY14E valuations for insurers we cover and applying similar assumptions for the non-covered universe," said the report. 
    The cabinet in October had cleared foreign direct investment of up to 49% in insurance companies up from the present 26%. The bill to amend theInsurance Act includes the proposal to hike FDI to 49%. Yashwant Sinha, head of the standing committee on finance, indicated that the panel was in favour of keeping the FDI limit in insurance capped at 26% but was open to allowing FII/ overseas corporate bodies to invest another 23%. 
    Incidentally, the insurance sector was opened up by Sinha in 1999. Sinha had rolled back a proposal to have aseparate 23% foreign investment limit for FIIs and NRIs over and above the 26% FDI limit. However, opposition from the Congress and Left parties compelled him to cap the overall limit at 26%. 
    "In the event the FIIs are permitted to buy, private insurers could list theirinsurance ventures for two reasons: One, unlock value for existing owners, and two, listing could provide employees a chance to monetize their ESOPs."