Stocks of insurance sector companies jump on FDI hike

Written by ENS Economic Bureau | New Delhi | Updated: Jul 25 2014, 13:53pm hrs
Shares of companies with interest in insurance business rose by up to 10 per cent on Thursday after the government allowed to raise the foreign direct investment in the insurance sector from 26 per cent to 49 per cent.

While the government has said that the management control will remain with the Indian company, the voting rights of the foreign partner has not been capped at 26 per cent. The issue on voting rights will have to go to Parliament. But we prefer a 49 per cent cap without any riders, finance minister Arun Jaitley had said earlier.

While no insurance company is directly listed at the stock exchanges, after the Cabinet Committee on Economic Affairs (CCEA) cleared the bill, shares of the 8 listed companies with interest in insurance business jumped between 2 and 10 per cent.

While Cholamandalam Investment and Finance saw its shares rise by 9.6 per cent during the day, that of Reliance Capital and Max India rose by 5.4 and 4.8 per cent respectively. Also the shares of Edelweiss Financial Services and Sundaram Finance too rose by over 4 per cent.

The gains, however, did not sustain till the market closing and only Reliance Capital closed with gains of over 4 per cent. While two of themReligare Enterprises and Bajaj FinServ corrected to close in the red, the remaining five closed with gains between 0.5 and 2 per cent only.

The stocks rose as the increase in FDI limit will result into infusion of fresh equity by the foreign partner in the insurance company and thereby provide them with the required capital to expand and grow their business.

Once approved by the Parliament this move should bring in the much required long-term capital for the sector. It will also bring in domain capital which is of critical importance in this phase of growth of life insurance industry, said Rajesh Sud, CEO & MD, Max Life Insurance.

Capping of voting rights has been a major concern raised by several insurers as they said that if it is capped to 26 per cent then the foreign partners would not be interested in raising their stakes.

It was earlier proposed that even though the FDI cap is raised to 49 per cent, the voting rights should be capped at 26 per cent but government officials suggest that there was a change in government stance right before the Union Budget.

It was decided that not too many restrictions such as a cap on voting rights would be imposed on the foreign partner but the interests of the Indian partner would also be protected, said a senior official.

Experts say that the move has potential to bring investments of up to Rs 1 lakh crore in the sector. Foreign insurers would need FIPB nod for any stake upwards of 26 per cent but FIIs can invest directly for that 23 per cent slab. Potential investments could be touch Rs 80,000 crore to Rs 1 lakh crore. This may push India into the league of top tier markets, said Anuraag Sunder, Insurance Expert, PwC.