Since the UPA government won the crucial trust vote on July 22, finance minister P Chidambaram has, on more than one occasion, articulated his government?s keenness to push through key financial sector reforms that have been hanging fire for a long time now. This includes the bill to raise the foreign direct investment cap in the insurance sector from 26% to 49%.

However, for some of the existing foreign players, raising their stake in the Indian joint venture to 49% may not be an auto-pilot decision.

?The change in FDI norms may bring in some more international insurance companies, who were not ready to invest at 26% shareholding,? said Rajesh Sud, deputy managing director of Max New York Life Insurance.

Few doubt the industry will continue to grow fast. In 2007-08, private players in the life insurance space grew by 84%. In fact, their combined marketshare is now higher than the Life Insurance Corporation of India.

The Indian insurance market has grown five times in the last six years since private players were allowed in. Analysts expect an increase in the FDI limit to bring in around $4 billion of ?sticky? foreign investment in existing ventures as well as speed up the entry of big players like All State, Nationwide and Samsung, who have been actively looking for Indian partners.

As ICICI Prudential Life Insurance Company?s executive director N S Kannan notes, ?The disposable income of Indian households is increasing. The insurance penetration is just over 4% of GDP. So the prospects are good.? But infusion of more capital holds the key to sustaining growth. Some reckon the industry needs Rs 10,000 crore more capital in the next few years to continue growing at 70%.

“The life insurance business is capital-intensive. Given the current market scenario, with insurers focussing on rapid geographic expansion, capital requirements are on the rise,? said Nitin Chopra, CEO, Bharti AXA Life Insurance Company. ?FDI increase from the present 26% to 49% is likely to attract more entrants into the life insurance space, thus enabling the market to expand,? he said.

HDFC Standard Life CEO Deepak Satwalekar makes another point. ?Raising the FDI cap would lead to easier flow of funds into the Indian insurance firms and faster growth. It would also lead to foreign partners taking up greater role in the Indian joint venture, which they were not doing till now.?

Not as simple

?It was a relatively easy decision to enter India even with the 26% cap on FDI. But happenings in the world financial markets cannot be ignored. All players may not be keen to raise their stakes,? said a private insurer?s chief executive.

Banks, asset management companies and hedge funds have borne the brunt of the sub-prime crisis, with billions of dollars being written off each quarter. But insurance players haven?t been immune and has taken a $77 billion hit since the crisis began last year.

Consider some of the players present in India. AIG, the Tata group?s partner in the life insurance space, has written down as much as $39.6 billion and returned two record quarterly losses of nearly $13 billion. Munich-based Allianz SE, Bajaj group?s insurance partner in India , has written down 1.3 billion Euros in 2007, among others.

?Valuations among global financial sector players have fallen dramatically. Confidence is down, many markets are on the verge of recession. Balance sheets have taken a hammering. So the amount of financial headroom for global merger and acquisition activity is limited,? the CEO of one insurer points out.

With the banking sector hurting the most, access to credit is also severely restricted. It is more expensive to raise money in the market, especially for M&A activity. ?The acquisition would have to be so attractive that it makes sense to borrow. But most companies are concentrating on using existing assets more efficiently,? a CEO added.

Satwalekar stresses that ?no company would leave the opportunity to increase its play in India, the other growing economy besides China.? Indeed, industry honchos agree that the prospects for India are so fantastic that most players want to scale up. But the question lingers as to how much free cash foreign players have.

Apart from the global financial stress, the growth of the Indian market way beyond what the players expected at the time of entry, could also pose an issue. The joint venture agreements specify that foreign partner raise stakes on the basis of current valuations.

?Valuations are driven by new business margins and volumes, but both are currently way higher than anybody anticipated. Some of the valuations that you hear today make you go dizzy,? a foreign player?s CEO concedes. Though partners have pre-determined formulae for arriving at stake valuations, there is room for disagreement.

?It is not inconceivable that some of the FDI from insurance players could get stuck. It could be due to valuations, or even due to global companies? boards tightening their pursestrings,? another CEO admits.

Again, while some ventures have agreements that require foreign partners to raise their stake immediately, other agreements are not explicit. ?AXA does have the option to increase its shareholding and will take a decision once the provision is passed in the Parliament,? Bharti AXA?s Chopra said.

?India is a very important market for us,? said Prudential Plc?s head of group media relations William Baldwin-Charles. ?If and when the opportunity to increase our stake arises we shall of course consider it as we would any other investment opportunity, not least ensuring that it meets our value creating criteria,? he explained. ?The relationship between the Indian and foreign partner is important ? a good relationship increases a foreign player?s confidence,? said Aviva India ?s managing director Bert Patterson.

As far as Aviva is concerned, Patterson stressed that increasing the stake to 49% will mean much greater commitment to a market they are already committed to. An increase in stakes by foreign players will help Indian insurers be more aggressive as there will be no capital constraints, he adds.

The Finance ministry is ready with the draft law to increase the FDI cap, but the UPA?s ability to push through the law in its short shelf life remains to be seen. ?If we choose to be positive, maybe the bill will go through in Parliament?s winter session. Only then will a clear time table and mechanism for increasing stakes emerge. The mechanism would also be a decisive factor for some foreign partners,? says one CEO.

Only time will tell if all the foreign players bring in their billions into Indian insurance ventures, but one thing is clear. Without FDI, the industry could face a severe capital crunch in a few years, especially since most Indian partners have their own core businesses to focus on.