An astute move by Warren Buffet

S. Murlidharan | Updated on August 28, 2011

Mr Warren Buffett, Chairman, Berkshire Hathaway.   -  THE HINDU

Perched prominently on the pantheon of American philanthropists, Mr Warren Buffet never ceases to amaze. To be sure, he shot into prominence as a philanthropist much after he came to be hailed as an investor with Midas touch. Last year, he joined hands with his friend and fellow philanthropist, Mr Bill Gates, to start an evangelistic mission whose objective is to prevail upon dollar billionaires to donate at least 40 per cent of their wealth to noble causes dear to their heart.

It is this mission that has brought him to Asia now but what he said in Japan, a nation yet to come to terms with the enormous losses inflicted by tsunami, could win him new admirers as well as detractors — time to buy into Japan. To the distressed Japanese at least, this could be fishing in troubled waters in its grossest form. But to cold headed businessmen, it would be an entirely acceptable display of opportunism, the one that can be, for good measure, rationalised as contributing to the nation rebuilding efforts.

In India, as expected, he has been combining his evangelistic mission with scouring for business opportunities. And he landed one soon enough which testifies to his meticulous and legendary planning skills. The extant Foreign Direct Investment (FDI) policy of the Indian government precludes more than 26 per cent equity stake for foreigners in Indian insurance companies and naturally this has left many of them cash-strapped, given the capital intensive nature of the business. After studying the insurance business model thoroughly, Mr Buffett seems to have come to the conclusion that equity stakes alone are not the only mode to figure prominently in the Indian insurance map. A large part of insurance expenditure is on marketing. Why not enter into a long-term marketing agency agreement with Bajaj Allianz? In return for a commission that predictably would be hefty, Mr Buffet's outfit would sell the insurance products of Bajaj Allianz. It is not as if the agency route has been coveted for the first time. Sole selling agencies have brought muchmoolah to Indian businessmen often as a sinecure so much so that the government had to crack its whip on appointment of sole selling agents in select industries. State Bank has been selling insurance product of New India Assurance Ltd. What marks Buffet's initiative is the context — to get round the restriction on FDI.

Agencies have lent themselves to diverse uses. Giving sinecure, giving bribes, tax evasion etc are amongst the more prominent uses. Under the stifling Central excise law, it was de rigueur for manufacturers to shift some of the post-manufacturing expenses, chiefly on marketing and distribution, to zonal distributors with the quid pro quo being sizeable commission. The bottom line was a sizeable reduction in the excisable value because the selling price to the distributors was sans the huge marketing and distribution expenses. Reduction in excisable value translated into hefty savings in excise duty.

The government's riposte was quick and sharp, adding back the value of flow back of consideration. Would the insurance regulator's's riposte be similar? Would it impose a stifling restriction on marketing and distribution commission an insurance company can pay? Or would the government take a more charitable view of things so long as foreigners do not breach the FDI limits? After all, why should anyone be upset if someone takes the initiative to increase insurance penetration in India? Whether Buffet's initiative is going to be the trendsetter or the one that could come unstuck, time alone will tell.

(The author is a Delhi-based chartered accountant.)

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Published on March 25, 2011

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