Cabinet also allows use of NSSF to cut government’s outgo, Food Corporation first beneficiary
The Cabinet on Wednesday approved a plan under which the country’s five public sector general insurers will raise the much-needed growth capital by issue of fresh equity to the public. Alongside, the government will also reduce its stake in these firms over a period of time, an exercise that would boost its capital receipts and ability to pump-prime the economy.
The Cabinet also approved a one-time loan of R45,000 crore to the Food Corporation of India from the National Small Savings Fund, a move that would help the corporation to carry out its grain procurement activities uninterruptedly. In future also, the NSSF corpus will be employed to reduce the interest outgo on schemes where the final spending obligation is on the government.
Currently, the government’s food subsidy dues to FCI for its past operations are about R50,000 crore. While in the current financial year, the whole subsidy amount has been duly released to the corporation, the unpaid dues from the previous years were forcing FCI to use a cash credit facility and take short-term loans, both at huge cost.
On the insurers, finance minister Arun Jaitley said: “The shareholding of these public sector general insurance companies will be divested from 100% to 75% in one or more tranches over a period of time. It could be either by fresh equity or offer for sale.” General Insurance, India’s only reinsurance company, will likely to be first to list. The other four — New India Assurance, National Insurance, Oriental Insurance and United India Insurance — would follow suit, one at a time. All five are making profits and have substantial net worth (see chart).
Together, they accounted for the bulk of the R96,379 crore in premium underwritten by the country’s non-life insurance industry in FY16. The general insurance industry, clearly, is grossly underdeveloped. Analysts said listing of the firms would help these players in a highly capital-intensive industry boost their product portfolios and client base, but refused to estimate their potential valuation.
“Listing of these general insurers will help the market in discovering values for general insurance business in India since there are no listed players currently. It would also enable the public sector players to raise additional capital from the market to fund future distribution expansion, technology enhancement and to meet the solvency requirements as the country is gradually moving towards a risk-based supervisory model,” said Shashwat Sharma, partner and head of insurance, KPMG in India. The proposal to list the general insurers was first mooted in Budget FY17. While the government could offload 5-10% of its holdings in the proposed initial public offerings by state-owned general insurance companies, these companies could also issue fresh shares in their bid to raise capital to expand business, sources told FE. The stake sales in insurance companies would boost the Centre’s disinvestment revenue next year.
On the NSSF loan facility to FCI, an official statement said: “The repayment obligation in respect of NSSF loans would be treated as the first charge on the food subsidy released to the FCI. This will help the FCI reduce its interest cost.” As per the proposal approved by the Cabinet, the NSSF will release R45,000 crore from its corpus to FCI before the end of the current financial year and the Centre will repay the principal and pay interest on it in annual instalments.
The loan from NSSF will cost the Centre an annual R3,500 crore (at 8.8% interest), while FCI currently incurs R8,500 crore (at 10.2%) on short-term loan arrangements with banks. With the delayed release of funds to FCI traditionally, the arrears had mounted. The government said: “NSSF in the future shall, with the approval of the finance minister, invest on items the expenditure of which is ultimately borne by the government.”
With the Centre planning to dip into NSSF resources in such a manner and states not very keen on taking loans from NSSF, the Cabinet also approved the exclusion of states and union territories with legislature except Arunachal Pradesh, Delhi, Kerala and Madhya Pradesh from the NSSF investments starting April 1, 2016.
The Cabinet also gave post-facto approval for a package to support micro and small enterprises. Under the package, the corpus of the Credit Guarantee Trust Fund has been enhanced from R2,500 crore at present to R7,500 crore, which will be fully funded by the government. Moreover, coverage of the loans under the credit guarantee has been increased from R1 crore to R2 crore.