Big is beautiful: Merger of PSU general insurance companies to unleash economies of scale

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Updated: June 14, 2019 6:41:10 PM

General Insurance: While there is unanimity on the benefits of consolidation of PSU insurance companies, experts are divided over the route to be adopted for this purpose.

New India Assurance, Oriental Insurance, United India, National Insurance CompanyGovernment is working for consolidation of public sector general insurance companies.

General Insurance: The Union government’s proposal to merge public sector general insurance companies will not only lead to consolidation in the market but it will also help the government in meeting its disinvestment target, said stock market and finance sector experts. The government is exploring two options, the first option is to allow New India Assurance to acquire other companies like ONCG acquired HPCL in 2018. In this case, New India Assurance can be allowed to acquire one or two companies like United India Insurance, National Insurance and Oriental Insurance Company Limited. Another option before the government is to merge these companies to create a large public sector giant on the lines of LIC. While there is unanimity over the move but experts are divided over the route to be adopted by the government because both the options have their own advantages and disadvantages.

In the last year’s budget, then finance minister Arun Jaitley had outlined Modi government’s vision to merge three public sector general insurance companies to create a public sector giant on the lines of Life Insurance Corporation of India. As a policy, Modi government has long advocated merger and consolidation of public sector companies to cut down the cost and take advantage of economy of scale.

Finance and investment experts endorse the move as it does not make sense for the government to operate four separate companies in the same sector.

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“Why a single owner should have three-four different entities in the same vertical. It doesn’t make any sense,” said Balwant Jain, a Mumbai based tax and investment advisor.

While outlining the government’s vision for these public sector insurance companies, Jaitley had said that the merged entity will be listed in the stock market.

At present, there are four public sector general insurance companies, New India Assurance, United India Insurance, Oriental India Insurance, and National Insurance Company Limited.

State-owned New India Assurance Company is the biggest insurance company in the general insurance market that has 34 private and government companies. New India Assurance has already been listed in the stock market since 2017.

“If the government decides acquisition by New India Assurance then it will lead to price discovery of these companies,” investment and tax expert Balwant Jain told Financial Express online.

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However, some other experts are against the move as being a listed company, it will not be easier for the New India Assurance to acquire these companies because all of them are fairly large in size.

“These companies are not small companies,” said SMC Global’s Saurabh Jain.

“If the government decides that New India Assurance should acquire these three companies then the market may take it negatively,” Saurabh Jain told Financial Express Online.

“The best way for the government is to independently list these companies in the market. This way the government can also meet its disinvestment targets,” said Saurabh Jain.

If the government follows the acquisition route then it will be the fourth major merger and acquisition of public sector companies after Indian Oil-IBP merger in 2007, ONGC’s acquisition of HPCL in 2018 and Power Finance Corporation’s acquisition of Rural Electrification Corporation this year.

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