Indian partners in insurance joint ventures might be less interested than previously believed about raising the ceiling for Foreign Direct Investment (FDI) in the sector.
A WikiLeaks cable originating from American diplomatic sources based out of Mumbai suggested that domestic partners might be lobbing against raising the FDI cap. Many industry representatives believe that some domestic partners, especially the more established firms, no longer need additional foreign capital, and some may be working against the lifting of the FDI cap behind the scenes, said the cable dated August 7, 2009.
The cable included inputs from a number of officials in the sector on the matter. It quoted Saibal Choudhury of MetLife Insurance, who suggested that opponents want to include investment portfolio or Foreign Institutional Investment (FII) under the raised FDI cap.
The introduction of FII into the equation might help the domestic partner bargain for a better deal with the partner, according to the cable.
The finance ministry is also looking to allow a 23% FII stake instead, as an alternative to raising the FDI cap to 49%.
Parliament’s Standing Committee on Finance has opposed raising the FDI cap to 49%.
The cable quoted that Peter Akers, India head of Munich Reinsurance, as saying not all domestic players see the increase in FDI as advantageous at the moment, since many had a steady stream of premium or investment income, making major capital expenditure less important.
Akers insisted that the domestic partner of at least one major joint venture was currently lobbing against the hike in capital, while foreign partners were lobbing for it, the cable said.
While many in the insurance sector have publicly supported the insurance amendment bill to raise the cap on FDI from 26% to 49%, noted the cable, the bill continues to be relegated to the background in favor of more populist economic and social legislation in parliament.
A comment section at the end of cable said the reform might take a while to pass. Since some joint venture contracts require the Indian partner to sell equity to the foreign partner once law changes, Indian partners may be reluctant to sell at the expected current valuations. It is a good reminder that in India, as else where, there are often unseen interests and influences on every side of an issue, even those that seems to be ‘low hanging fruit’, as this legislation has been frequently characterized.
The cable signed off with a prophetic outlook for the bill. If the Congress party continues to focus on populist-but inclusive-legislation policies, such as additional rural expanding, we should expect even the most sensible economic reform measures to take far longer to implement than expected, it said. Nearly four years later, the bill remains stuck.
