Column : Does the FII route make sense?

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Percy S Mistry: Dec 12 2012, 01:11 IST

and pension funds. It will have the opposite effect from that intended by damaging rather than enhancing India’s image in the foreign investment community. It will create the opportunity for unfair (possibly illegitimate) windfall gains for round-tripped domestic capital via the FII route into domestic JVs that are close to launching IPOs.

The JV agreements that foreign insurers have with their domestic partners (all approved by IRDA), reflect clearly the intent of every foreign partner to hold 49% of the equity in the JV as soon as the rules so allow. Foreign insurers expected the FDI cap to be lifted within 5-6 years of entry. They felt encouraged when the cap was abolished for investment banks and asset management companies (integrally associated with the insurance business) within five years of their entry.

So, if asset management companies, investment banks and foreign commercial banks can be 100% foreign owned in India, why should only the insurance segment of the financial services industry be subject to unjustifiable discriminatory treatment in terms of FDI limits? Is the intent to protect the LIC and other public insurers? Is that good for the Indian consumer of insurance? If not what will be achieved?

What is to be gained by encouraging FII investment and discouraging FDI investment in a long-term industry with a 30-40 year business horizon like insurance, when every Indian government has wanted to achieve precisely the opposite? Are we now saying we now prefer FII to FDI after complaining that FII investment is hot and volatile

... contd.

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