Foreign promoters of Indian insurance companies have waited long for the Indian government to relax foreign direct investment (FDI) norms that will allow them to increase their stake to 49 per cent in the insurance companies they were involved in.
But how the foreign co-founders of the insurance joint ventures will raise their stakes to 49 per cent will depend on the new provisiaons that are introduced in the Insurance Bill that is likely to be passed soon and also the shareholder agreements signed by them with the Indian shareholders.
It turns out that many agreements are already in place to ensure that foreign partners ramp up their hold, say industry experts.
According to Ashvin Parekh, Partner, Ernst & Young, who has helped formulate 22 life and non life joint venture agreements in insurance, “Most shareholding agreements between Indian and foreign promoters especially in the case of insurance companies floated by public sector banks envisage that after the FDI norms are relaxed, the foreign partner will continue to infuse capital over a span of 3 to 5 years till its stake reaches 49 per cent.”
He said it was rare in the agreements for straight transactions in which the domestic partner sells its 23 per cent to the foreign entity. In another type of agreement, the partner gradually infuses equity over a three to five year time-frame to raise the stake. There is also another option, of raising the foreign stake in one shot.
“This is not done by many companies as they don’t want the excess capital to lie idle in the JV,” Parekh said. At present, FDI in insurance capped at 26 per cent. Therefore the Indian promoters of insurance companies hold 74 per cent.