Column : Does the FII route make sense?
If FIIs now entered into the shareholding of Indian insurance JVs at book value then in most JVs (especially the 17 late entrants in life insurance, 15 in general insurance and 4 in health insurance) they would be buying shares at 25-40% of par to reflect the sustained losses that long-term foreign shareholders have taken. These losses have been exacerbated by JV agreements that require foreign insurers to provide guaranteed returns of 12-24% to their domestic partners on the domestic share of the equity in these JVs. If FIIs entered into the share-holdings of the handful of pre-2003 JVs that are now in profit, they would paying 2.5 to 3 times book value at a minimum.
The tiering problem (that has arisen inadvertently) of there now being two classes of private insurance JVs in India (i.e. early entrants that are profitable versus late entrants who will not be profitable for some time) introduces a major element of unfairness into the system by introducing the forced entry of FIIs into insurance JV shareholdings well before IPOs can be contemplated.
This proposal will defeat the stated intent of MoF/GoI to increase confidence on the part of the foreign investment community by rewarding (speculative?) FIIs and discriminating against serious long-term FDI investors like insurance companies
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