The Hindu Business Line : Vijaya Bank to exit life insurance venture

Bangalore/ New Delhi July 31 Public sector Vijaya Bank has decided to completely pull out of the life insurance joint venture with Punjab National Bank and the Principal Financial Group (PFG) of the US.

The move has jeopardised PFG’s proposal to enter the domestic life insurance market. This is because under the current Reserve Bank of India guidelines at least two banks are necessary in any joint venture.

The Vijaya Bank Chairman and Managing Director, Mr Prakash P. Mallya, told Business Line, “We are pulling out completely from the joint venture, since there is no financial benefit for Vijaya Bank in it.”

As per the shareholder agreement, the proposed capital for the life insurance venture was Rs 110 crore. Vijaya Bank was a minority stakeholder with a stake of just 12 per cent. PNB and PFG were expected to hold 30 and 26 per cent respectively. In fact, Vijaya Bank had sought a larger equity role in the venture. Vijaya Bank had proposed to buy out Berger Paints’ 32 per cent stake in the joint venture. But the proposal had become deadlocked, sources said. This was because PNB wanted to takeover the stake and retain majority control in the venture. In fact, PNB’s Chairman and Managing Director, Mr K.C. Chakraborty, had recently said, “The company has still not been formulated and there might be a rethink on all the issues. The shareholding pattern and the constitution of the company might change.”

Passive investor

Vijaya Bank fears that it would become a passive financial investor. “Small stakes will not give us any big benefits,” Mr Mallya said. Asked whether the pullout included all the joint ventures with the partners, Mr Mallya said, “We are pulling out completely from all the joint ventures.” This implied that the operational companies in the three-way joint venture arrangement would also be impacted. The operational ventures include the Principal PNB Asset Management Company, where Vijaya Bank is a 5 per cent stakeholder and the PNB Principal Insurance Advisory Company where it is a 19 per cent stakeholder.

However, PFG was still attempting to salvage the joint venture. PFG’s country head, Mr Rajan Ghotgalkar, said, “Principal Financial is committed to expand its operations in India. At the moment we are reviewing the entire strategy and currently, negotiations are on with the other joint venture partners.”

Other suitors

The pullout now leaves the floor open for other suitors to woo Vijaya Bank. Those in the race include private sector insurers that Mr Mallya declined to name. He said, “We will examine all the options before us. We also have other foreign companies before us.” But almost all the private sector insurers were on the lookout for the induction of third partners to increase the paid-up equity and accelerate their respective growth rates. This was because under the current guidelines foreign partner stakes in domestic insurance ventures is capped at 26 per cent.

Accelerated growth implied increase in liabilities and consequent solvency pressures that would have to be offset by periodic capital infusions.

More Stories on : Life Insurance | Public Sector Banks | Punjab National Bank

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