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Insurers seek new partners

Mukesh Ambani-controlled Reliance Industries Limited's plan to buyout Bharti Enterprises' 74% stake in its two insurance ventures with AXA could well mark the beginning of a slew of many such deals in the insurance sector as domestic partners seek to raise capital by divesting stakes. Mahua Venkatesh reports. An industry in churn

india Updated: Jun 14, 2011 01:32 IST
Mahua Venkatesh

Mukesh Ambani-controlled Reliance Industries Limited's plan to buyout Bharti Enterprises' 74% stake in its two insurance ventures with AXA could well mark the beginning of a slew of many such deals in the insurance sector as domestic partners seek to raise capital by divesting stakes.

Analysts tracking the sector told Hindustan Times that many Indian promoters are in discussions to induct a third partner in existing joint venture companies.

Aviva Life and Metlife are two such firms willing to divest the domestic partner's stake and rope in a third partner, industry sources said.

"We are looking to rope in a third joint venture partner in order to expand our distribution network and it has nothing to do with our financial status as we have broken even and are well capitalised," an Aviva Life spokesperson stated.

The Indian partner of one company that had borrowed funds for a 10-year period, is now in discussions with a domestic company to sell a part of its stake to repay the debt.

At present, the total capital deployed by the insurance industry, both life and non-life, is about Rs 35,000 crore, of which Rs 26,000 crore is in the life segment. Of this about Rs 9,000 crore is contributed by foreign players.

Procedural delay in formalising the norms for initial public offering (IPO) by insurance companies has also limited the firms' ability to raise capital.

Existing law says that for launching an IPO, an insurance company needs to have been operational for at least 10 years.

According to SEBI guidelines, a company also needs to register three consecutive years of profit in order to list itself, a condition not met by most insurance companies, which are yet to break even.

Life insurers such as Reliance Life Insurance and ICICI Prudential Life Insurance have expressed intention to raise money through IPOs.

Existing laws limit foreign direct investment (FDI) in the insurance sector to 26%. In 2008, the government tabled a Bill in Rajya Sabha that seeks to raise this ceiling to 49%.

"We understand the need to increase the FDI limit in the insurance sector at the earliest as it is a cash intensive business and we are trying to introduce the bill in the forthcoming monsoon session," a senior government official said.

New norms in unit linked insurance products (ULIPs) have also hurt the companies' top lines, forcing them to raise additional capital to maintain solvency.

Ulips are hybrid life insurance products in which a part of the subscriber's invested money is set aside as premium, and the balance invested in equities. ULIPs account for more than half of the life insurance business.

Last year, Insurance Regulatory Development Authority (IRDA) introduced new norms asking companies to offer a minimum guaranteed return of 4.5% on all ULIPs.

Insurance firms have reported 10% drop in fresh policy sales since September 2010, as companies decided against launching and selling ULIPs.

An industry in churn