Column : Does the FII route make sense?
To begin with, it compromises the economic interests of all foreign insurers that have entered the Indian insurance industry; especially those who did so after 2004. Their joint-ventures have yet to reach break-even and generate positive cash surpluses and accumulate reserves sufficient to meet future long-term policy payout obligations.
It also risks introducing new third parties (i.e. FIIs) with no experience of the insurance industry as major shareholders in insurance JVs at the wrong time and at the wrong value. FIIs stand to make windfall gains in a short period of time when IPOs are launched. Yet they will have taken none of risks, nor borne the heavy costs that foreign insurers have borne for the last 6-7 years, in the face of regulatory U-turns, a sharp economic downturn, and acute policy uncertainty. All have affected the insurance industry adversely in terms of risks, revenues and profits. That introduces an element of unfairness and discrimination against the interests of long-term players with commitment to India.
The proposal favours insurers that already have related FIIs in India—through their in-house asset management operations—versus those that do not. The former can align interests through sweet-heart deals with affiliated FIIs while the latter cannot.
The proposal will create major valuation problems at entry
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