The new foreign direct investment (FDI) norms announced in February, which allow companies with less than 50 per cent foreign investment to make downstream investment in any sector, have thrown up a fresh set of questions on investments in the insurance sector. The Reserve Bank of India feels these rules can be used to circumvent and subvert other restrictions.
As per current norms, FDI in the sector is capped at 26 per cent. RBI, however, fears that new definition of ‘ownership’ and ‘control’ could result in the ceiling being breached. “It is observed that many entities in the insurance sector are substantially ‘owned’ and/or ‘controlled’ by banks and the application of indirect holding norms and composite foreign holding norms would alter the foreign shareholding pattern in these entities significantly,” RBI pointed out in a letter to the Finance Ministry last month.
Under the new norms, “ownership” and “control” are defined on the basis of the percentage of equity holdings or the power to appoint majority directors on the board of the company.
RBI said the new norms could lead to formation of “shell companies” whose sole intention would be to make downstream investment in sectors with FDI restrictions.
This can be done by setting up of Indian companies by non-resident entities with stakes up to 49.9 per cent and then making downstream investments in areas where FDI is restricted or prohibited, it said.
The RBI has said that under the new norms for computation of foreign investments based on equity stakes, many Indian private sector banks would now have to be considered as “foreign owned (though Indian controlled).”
Among such entities are ING Vysya Bank, ICICI Bank, Development Credit Bank, Yes Bank, IndusInd Bank, Federal Bank and HDFC Bank. Importantly, four of these banks have insurance joint ventures with foreign partners. When such banks control large stakes in insurance ventures, they indirectly violate FDI limits, says RBI.
Last December, the government tabled in Rajya Sabha a Bill that aims to bring in comprehensive amendment of insurance laws, including a proposal to raise the foreign investment ceiling from 26 per cent to 49 per cent.