Flexibility needed

It has taken an inordinately long time for India to untangle its ownership rules for the insurance sector. It was after much political wrangling that the Insurance Laws (Amendment) Bill was passed in March 2015, thus lifting the Foreign Direct Investment (FDI) cap for all insurers from 26 to 49 per cent. But as this came with the stringent condition that these firms must be “owned and controlled” by Indian entities, the problems for players did not end there. Confusion on this issue was resolved only recently and the sector has since seen a pick-up in deal-making. The last few months have seen foreign investors hike their stakes in ICICI Lombard, HDFC Ergo, HDFC Standard Life and Reliance Nippon Life, among others. Seen in this context, the Insurance Regulatory and Development Authority’s recent discussion paper, mooting further ownership changes for insurers through listing, seems inopportune. The paper proposes that listing on the stock exchanges within three years be made compulsory for all general and life insurers who have completed eight and ten years of operation respectively.

This diktat, if enforced, can throw up three key challenges for private insurers, leading to renewed uncertainty. One, in the case of insurers who have recently inked investment deals, an IPO will force either the foreign or domestic partner to dilute equity in favour of public investors. Given that three years is rather a short time within which to expect significant unlocking of value, both parties may be loath to do so. Two, with as many as 32 of the 55 insurers meeting the 10-year norm, there may be a bunching up of insurance IPOs. With the FDI cap set at 49 per cent, the headroom for FPI participation would be limited and such issues would have to rely heavily on domestic investors. Three, the sector has seen significant regulatory tightening in the last five years designed to make insurance products cheaper and more customer-friendly. With players still in the process of revamping their product and business mix to adjust, this may not be an ideal time to focus on P&L.

To be sure, IRDA’s intent in mandating listing is to raise the disclosure standards for insurance firms, bring wider participation in their decision-making and subject their financials to greater public scrutiny. The insurance sector is often criticised for vending opaque products, mis-selling and poor disclosures. But then, as the interests of shareholders are often in direct conflict with those of policyholders, listing may not really address this. Mandating simpler products, lower operating costs and more accessible public disclosures may address consumer concerns far more effectively. In balance, it may be best to allow insurers some flexibility in the timing of their IPOs, as capital needs will in any case force many of them to eventually list. Meanwhile, IRDA’s suggestion that players adopt the governance and disclosure norms of listed companies ahead of actually going public is a good one and must be taken to heart by Indian insurers.

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