Ordinance impact: Govt can dilute stake in PSU insurers

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Mumbai | January 3, 2015 9:49 AM

The government is now in a position to dilute its equity stake by up to 49 per cent in five public sector general insurance companies...

Insurance ordinance, PSU insurers, IRDAClauses in the insurance ordinance have made it impossible for foreign partners to get management control in India. (Thinkstock)

The government is now in a position to dilute its equity stake by up to 49 per cent in five public sector general insurance companies following the promulgation of the Insurance Laws (Amendment) Ordinance, 2014 by the President last week.

However, the clauses in the ordinance have made it impossible for foreign partners to get management control in India, but it has paved the way for the entry of Lloyds of the UK, the world’s largest reinsurance market, into India and empowered Securities Appellate Tribunal (SAT) to hear appeals against insurance regulator Irda’s orders.

The government has added a new section —  Section 10B — to the General Insurance (Business) Nationalisation Act (GIBNA) which says “General Insurance Corporation (GIC) and insurance companies may raise their capital for increasing their business in rural and social sectors to meet solvency margins and such other purposes as the Central government may empower in this behalf.”

However, the ordinance has specified that the shareholding of the government should not fall below 51 per cent at any time. It has not indicated any privatisation plan for LIC though a section of India Inc was lobbying for the same.

KK Srinivasan, former member, Insurance Regulatory and Development Authority (Irda), said, “thus partial privatisation of GIC, Oriental Insurance, National Insurance, New India Assurance and United India is enabled. If the equity is allowed to be raised from the open market, registered FIIs who are permitted to trade in our stock markets may also perhaps be allowed to acquire stakes in PSU insurers.” At present, these five PSU general insurers are fully owned by the government.

Any person aggrieved by a decision by the regulator, Irda within 30 days of receiving the order can appeal to the existing SAT which will have a member from the insurance industry. At present, SAT only hears appeals against capital market regulator, Securities and Exchange Board of India (Sebi).

SAT, after being appealed by the insurer and after hearing to Irda, can cancel any order made by the insurance regulator or direct the acceptance of such a return which the regulator has declined to accept, if the insurer satisfies SAT that Irda has wrongfully passed an order.

The government has, however,  virtually made it impossible for foreign partners to get management control in insurance companies in India. Section 2.7A of the ordinance defines an Indian insurance company as “which is Indian owned and controlled in such manner as may be prescribed”. Explanation under Section 2.7A.b further elaborates Indian control.

It states that “control shall include the right to appoint a majority of the directors or to control the management or policy decisions by virtue of their shareholding or management rights or shareholders agreements or voting agreements”. Thus, if the foreign partner looks for management control, it will no longer be possible, he said.

The ordinance also provides for permitting foreign reinsurers like Lloyds to open a reinsurance branch in the country. Such a branch is now defined as an ‘Indian Insurance Company’.

The government has amended the definition of ‘Indian Insurance Company’ in Section 2 to include “a foreign company engaged in reinsurance business through a branch established in India”.

The explanation clause states: “For  the purpose of this sub-clause the expression ‘foreign company’ shall mean a company or body established or incorporated under a law of any country outside India and includes Lloyds, established under the Lloyds Act 1871 (UK) or any of its members.”

Though ordinance has been issued, foreign investment is unlikely to come any time soon as the process to implement the proposals will take many months.

“Now Irda has to amend or bring in regulations to align the regulations to the Ordinance. That is a three tier process involving consulting the Insurance Advisory Council, making draft regulations, getting the regulation passed by the Irda board and the government  notifying the regulations in the Gazette. Companies will  have to wait till the process is completed which may take a few weeks to a few months,” Srinvasan added.

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