Identifier
Created
Classification
Origin
09MUMBAI328
2009-08-07 12:36:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Mumbai
Cable title:  

INDUSTRY DEBATES NEED FOR INCREASED FDI LIMITS AS REFORM

Tags:  EFIN ECON EINV PGOV IN 
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ZNR UUUUU ZZH
R 071236Z AUG 09
FM AMCONSUL MUMBAI
TO RUEHC/SECSTATE WASHDC 7388
INFO RUEHBI/AMCONSUL MUMBAI 2613
RUEHNE/AMEMBASSY NEW DELHI 8615
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEAIIA/CIA WASHDC
RHEHAAA/NSC WASHINGTON DC
UNCLAS SECTION 01 OF 03 MUMBAI 000328 

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON EINV PGOV IN
SUBJECT: INDUSTRY DEBATES NEED FOR INCREASED FDI LIMITS AS REFORM
BILL FACES DELAYS

MUMBAI 00000328 001.2 OF 003


UNCLAS SECTION 01 OF 03 MUMBAI 000328

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON EINV PGOV IN
SUBJECT: INDUSTRY DEBATES NEED FOR INCREASED FDI LIMITS AS REFORM
BILL FACES DELAYS

MUMBAI 00000328 001.2 OF 003



1. (SBU) Summary: After years of fast-paced growth, the Indian
life insurance industry saw a seven percent decline in premiums
collected in 2008-09. Industry experts asserted that these
declines were more the result of domestic factors such as the
interest rate hikes in mid-2008 rather than the impact of the
global financial crisis. India's biggest player, the
state-owned Life Insurance Corporation of India, continued to
lose market share to India's 21 privately-owned life insurers,
whose premiums grew. While most industry insiders publicly
support the Insurance Amendment Bill, which would raise the
foreign direct investment cap from 26 to 49 percent, it has
continued to take a back seat to other, more populist economic
and social legislation in Parliament. Many industry
representatives believe that some domestic partners, especially
the more established firms, no longer need the additional
foreign capital, and some may be working against the lifting of
the FDI cap behind the scenes. However, the industry is united
that other reforms introduced in the bill, including
transforming the existing Insurance Regulatory and Development
Authority (IRDA)into a full-fledged insurance regulator, are
desirable. End Summary.



Growth in the life insurance industry impacted more by domestic
conditions than the global crisis

--------------




2. (SBU) The insurance sector has been one of the success
stories of India's economic reform process. According to IRDA
data, annual life insurance premiums collected during the year
2008-09 fell to Rs.860 billion ($17.61 billion) from Rs.920
billion ($19.17 billion) in the previous year, a seven percent
decline from the 36 percent growth seen the year before.
Nevertheless, Peter Akers, India Head of Munich Reinsurance,
pointed to data indicating that premium collections for all 21
privately owned life insurance companies grew; the lone
exception was state-owned Life Insurance Corporation of India
(LIC),the largest and the oldest life insurer. Marking the
shift from government to private insurers, LIC saw its market
share fall to 41 percent in 2008-09 from 48 percent the previous

year. On the other hand, private life insurers increased their
market share to 59 percent in 2008-09 from 52 percent in
2007-08.




3. (SBU) According to Prabhu, the decline in growth began before
the onset of the global financial crisis, sparked by a series of
interest rate hikes by the Reserve Bank of India (RBI) to
control inflation in the summer of 2008. He explained that as
increased interest rates removed liquidity from the capital
markets, investors stopped contributing funds to from the most
popular insurance investment plan know as Unit-Linked Insurance
Policies, or ULIPs, which are essentially mutual fund
investments. (Note: In simple terms, the stock and bond
markets were declining, so investors could get better returns in
short term saving deposits sponsored by banks. End Note.)
After the RBI lowered interest rates to improve domestic
liquidity conditions after the collapse of American investment
bank Lehman Brothers, capital market conditions improved and
investors returned to ULIPs . Binay Kumar Agarwala, Senior Vice
President, ICICI Prudential Life Insurance, admitted that the
life insurance sector had been growing too fast, and some
moderation was needed. The crisis did not directly affect the
balance sheets of insurance corporations, but hit growth, he
added. Contrary to expectations, Prabhu added that even at the
height of the financial crisis, domestic insurance companies
were able to raise incremental capital from their foreign
partners to meet solvency margins. (Note: Life insurance
companies are mandated to maintain capital for a solvency margin
of 1.5 times insured liabilities. End Note.)



Insurance Amendment Bill: Do Domestic Partners Really Want a FDI
Hike?

--------------




4. (SBU) Insurance industry executives have publicly supported

MUMBAI 00000328 002.2 OF 003


the passage of the long-awaited Insurance Amendment Bill, which,
among other things, would raise the sector's foreign equity cap
from 26 to 49 percent. Considered by conventional wisdom the
easiest of the reform measures to pass, the Congress Party has
still not introduced the bill to Parliament for a vote, sparking
speculation about the Indian government's commitment to this and
other reform objectives. According to Akers, not all domestic
players see the increase in FDI as advantageous at the moment.
(Note: Of India's 21 privately-owned insurance companies, only
two, Sahara and Reliance, do not have foreign joint venture
partners. End Note.) He explained that in the initial stages of
the insurance business, companies needed capital for marketing,
infrastructure and personnel to build out their sales networks.
As companies grew, so did steady streams of premiums and
investment incomes, making major capital expenditures less
important. Accordingly, newer entrants need large capital
infusions, but established players are less interested in - and
in some cases, may oppose -seeing the FDI cap raised. For
example, Puneet Nanda, Executive Vice President of ICICI
Prudential Life Insurance, the largest private life insurance
company, noted that while 60 percent of total premiums came from
new business two years ago, that figure is now only 45 percent.
(Note: While ICICI claims that the decrease in new premiums
collected as a percentage of overall premiums is an indication
of a maturing business model, it can also be taken as an
indication that premium collection slowed because of external
conditions, not market maturation. End note.) Nanda affirmed
that raising the industry's FDI cap was still welcome, but no
longer necessary. Indeed, Akers insisted that the domestic
partner of at least one major joint venture was currently
lobbying against the hike in capital, while the foreign partners
were lobbying for it.




5. (SBU) If they cannot block the bill as a whole, opponents
may introduce amendments which dilute the FDI cap measure. The
bill typically must go to the Finance Standing Committee for
comments before Parliamentary consideration, providing an
opportunity for edits. Saibal Choudhury of MetLife Insurance
suggested opponents want to include portfolio investment under
the raised FDI cap. Competition with Foreign Institutional
Investors (FIIs) for additional shares would make it more
difficult for the foreign partner to acquire the full 23
percent. (Note: Some joint venture contracts specify that the
domestic partner is obliged to sell an additional 23 percent
equity to the foreign partner when the cap is raised, and some
contracts specify the price. Because no insurance companies are
publicly traded, an outside party like an accounting firm or an
investment bank would otherwise be needed to value the firm
before any stake sales take place. End Note.) Even if the
foreign partner acquires all 23 percent, the option to sell to
FIIs may enable the domestic partner to bargain for a
significantly higher price. Choudhury stated that foreign
players would interpret this as a broken promise on the part of
the GOI, and implied that inability to raise their stake to 49
percent may diminish interest in supplying more capital to the
industry.




6. (SBU) Another key amendment in the bill proposes to increase
the powers of the Insurance Regulatory and Development Authority
(IRDA). This move would enable the IRDA to become an
independent and authoritative regulator similar to the
Securities Exchange Board of India (SEBI). Their current lack
of regulatory discretion is considered problematic by most
industry observers. For instance, Reliance Life Insurance was
planning to raise capital through an IPO. However, IRDA
rejected this proposal stating the rule that Indian promoters
having more than a 26 percent stake in an insurance company
could reduce their holdings only after a waiting period of 10
years, or they would have to seek ask the government to reduce
the waiting period. Akers noted that once the Insurance
Amendment Bill was passed, IRDA could make the decision to
reduce the waiting period instead of the government.




7. (SBU) At a recent seminar, IRDA chairman J. Hari Narayan
said he expected the insurance bill to be passed this year, but
admitted that the Bill lacked clarity on some issues. Though
the Bill would raise the foreign direct investment cap to 49
percent, it is unclear which equity stake would be diluted
should the joint venture list shares through an IPO. Narayan
said that experts assume that the foreign partner will have to

MUMBAI 00000328 003.2 OF 003


dilute its stake, or it will have a controlling stake in the
venture which may not be amenable to the Indian law. Agarwala
of ICICI Prudential noted that this statement was taken by
industry insiders as a sign that such a clause may be debated
before the final bill is passed.



Re-insurers to be allowed to set up branch offices to conduct
business

--------------




8. (SBU) Akers noted that one overlooked reform measure in the
pending bill is that it allows reinsurance companies to
establish branch offices in India. He explained that
reinsurance allows insurers to securitize the largest and
riskiest contracts taken by insurance companies. Under current
legislation, domestic-foreign joint ventures in the reinsurance
business were allowed, but none existed because Indian companies
were not ready to commit the large amounts of capital needed to
fund them. Reinsurers wanted to set up branches so that the
risk could be transferred to the balance sheet of the global
parent company, but under current legislation it would be on the
books of the Indian JV which would not be as well-capitalized as
the foreign parent. As a result, large foreign reinsurers like
Swiss Re, Munich Re, and Berkshire Hathaway only have back
offices in India. All re-insurance business by the domestic
insurance companies was done outside of India, leading to a
capital outflow of reinsurance premiums. He added that General
Life Insurance, the only Indian re-insurer predominately in the
non-life segment and Hannover Re had announced a tie up but no
business had been conducted yet.




9. (SBU) Comment: Over the past five years, insurance industry
insiders have been stating publicly and privately that FDI caps
needed to be raised to help accelerate growth, and have urged
Parliament to pass this important reform legislation. Today,
with many of these JV partnerships well-capitalized through
consistent growth, some of the domestic partners claim to no
longer need the additional foreign capital and as some believe,
may not want to sell further equity stakes. Since some JV
contracts require the Indian partner to sell equity to the
foreign partner once the law changes, Indian partners may be
reluctant to sell at the expected current valuation. However,
it is a good reminder that in India, as elsewhere, there are
often unseen interests and influences on every side of an issue,
even those that seem to be "low hanging fruit," as this
legislation has been frequently characterized. If the Congress
continues to focus on populist - but inclusive - legislation and
policies, such as additional rural spending, we should expect
even the most sensible economic reform measures to take far
longer to implement than expected. End Comment.
FOLMSBEE