Money & Banking

As cap on FDI in insurance goes, sector set for M&A action in 2016

| | Updated on: Jan 03, 2016
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With the Centre relaxing FDI cap for insurance, this sector is set for a spate of M&A in 2016.

Anuj Sah, Associate Partner with law firm Khaitan & Co, said that out of the 35 joint ventures in the life and general insurance industry, at least half of them will see the foreign partners increase their stake.

Already seven companies have announced deals where the foreign partners are raising their stake from 26 per cent to 49 per cent.

They are — Hong Kong-headquartered AIA in Tata AIA Life Insurance Company, UK-based Bupa in Max Bupa Health Insurance, Canadian insurer Sun Life Financial in Birla Sun Life Insurance, French insurer AXA in life and general insurance joint ventures with Bharti Enterprises, German Munich Re’s insurance arm ERGO in HDFC ERGO general insurance and Dutch insurance group Aegon in Aegon Religare Life Insurance.

FDI flows

V Manickam, Secretary General of of the Life Insurance Council, said that while the insurance industry expected inflows to the tune of ₹20,000 crore after the passage of the Insurance Amendment Bill, the actual inflows will come over a period of time.

“The FDI flows will come over a period of time and not in one year. It was not that the Indian insurance sector was starved of capital but the fact is it takes time to do its own due diligence. Getting both partners to sit on the table and agree on numbers and way forward is not easy,” said Anuraag Sunder, Director-Insurance, PwC.

Valuation of the venture

Sanket Kawatkar, principal and consulting actuary of Milliman, adds that valuation may be the main dispute area for both partners to agree on, which may result in a delay in stake sales.

“The difference in expectation of the domestic partner on the valuation of the insurance joint venture and what the foreign promoter is ready to pay, is getting reflected in the delay in stake sales,” said Kawatkar.

He said that the valuation of the insurance joint venture is going to be derived by not just quantifiable aspects but softer aspects such as the growth that the foreign promoter perceives in the Indian market and comfort with the Indian promoter.

Analysts also say that there is also considerable interest from private equity, pension and sovereign funds to pick up a stake in the domestic insurance sector as seen in ICICI bank, which plans to sell its 6 per cent stake in ICICI Prudential to PremjiInvest and Temasek.

Price discovery

Sunder said, “While there are foreign partners who have raised stake directly to 49 per cent, others are raising stake in a calibrated manner which is a far deeper and more thought out process to work through as they are doing a price discovery.”

For consumers, the increased inflows into the sector will result in better products and pricing with insurers investing in better infrastructure and expertise.

Published on January 19, 2018

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