DFS clears way for $3 bn inflow into insurance

The Foreign Investment Promotion Board (FIPB) on Friday cleared a proposal by Kotak Mahindra Bank to increase the foreign investment limit in the bank to 55% from about 49%. Sources said the approval came after a clarification from the department of financial services (DFS) that this would not necessarily lead to problems for the bank’s plan to raise the foreign investment limit in Kotak Mahindra Old Mutual Life Insurance.
When the government raised the foreign investment (FPI/FDI) limit in insurance from 26% to 49% in March, it stipulated that the insurance ventures in the country should remain “Indian owned and controlled”. This provision had led to fears that the plans of many insurance companies including those of HDFC and ICICI Bank could stumble upon this condition, enforced by the Insurance Regulatory and Development Authority, given that these (parent) companies are majority foreign-owned, although their foreign ownership is widely dispersed (with various FPI stakes) and management is in Indian hands.
Kotak Bank holds 74% in its life insurance arm. HDFC holds 74% in HDFC Standard Life while the UK-based Standard Life holds the balance stake.
The DFS, which is the administrative department for the insurance sector, is now learnt to have taken the view that if the foreign ownership in these parent companies is not concentrated and does not wield management control, their investment in downstream insurance companies could be treated as Indian.
The DFS move, analysts said, would create room for increased foreign investment in the insurance ventures of these firms. With the hike in foreign investment limit in insurance, about $3 billion in foreign capital is expected to come into a sector starved of capital for expansion.
After the merger of ING Vysya Bank with Kotak on April 1, the bank had sought FIPB approval to increase the foreign shareholding. Foreign investors can acquire up to 49% in Indian private banks through the automatic route, but beyond that and up to 74% requires the FIPB’s nod.
Under the FDI policy, downstream investment of a majority foreign-owned company would be considered foreign. By that logic, Kotak’s investment in the insurance company would have been considered as foreign investment, breaching the 49% cap in the sector. However, the insurance sector is exempted from these general rule and is guided by Irda regulations.
However, doubts had emerged after the Irda recently wrote to insurance companies that they will have to ensure “Indian ownership and control” while obtaining higher foreign investment and securing government approval for the same.
Adding to this confusion was a finance ministry notification in February, according to which an Indian insurance company needed to be controlled by resident Indian citizens or Indian companies, which are in turn “owned and controlled” by resident Indian citizens.
This doubt was removed on Friday with the DFS clarification and the FIPB’s decision in the case of Kotak Mahindra Bank.
Cover Drive:
* FIPB nod to Kotak Bank’s proposal to up foreign investment limit in it to 55% after DFS clarified it may not necessarily affect FDI limit in its insurance JV
* Foreign investment limit in insurance hiked to 49% in March but Irda fiat requiring insurance firms be “Indian owned and controlled” threatened plans of several firms to raise foreign capital
* DFS clarifies that though parent firms of some insurers are majority foreign-owned, since their foreign ownership
is widely dispersed and management is in Indian hands, they don’t violate the “Indian owned & controlled” norm

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