Just as the heat wave has begun to swing public opinion in favour of open access to eliminate private monopoly in power distribution, one wishes something similar would happen to make foreign investment in insurance equally palatable.
Prime Minister Narendra Modi would soon be taking a call if this piece of key legislation would go through Parliament in the Budget Session. But honestly, the likelihood is bleak. Not because what his team thinks about it, but more because most owners of the private sector insurance industry in India do not want it.
This is because of the investment already made in the sector. When the 26 per cent cap for foreign direct investment was allowed in 1999, several of the domestic partners in the joint ventures encouraged their foreign counterparts to exceed the limit through use of investment vehicles. One of them had even named the foreign partner first in the JV and then switched it around.
The extra capital was necessary as the Indian companies were unwilling to make the scale of investment necessary to make the ventures viable. And this has made possible 52 insurance companies (life and general) to get into the market.
Prospects changed subsequently. The valuations of the insurance companies have risen in the past 15 years and rather well at that. This has happened, because of the profits the insurance companies have made on their investments in capital markets. They are almost all making underwriting losses i.e. in their core business.
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But profits raise valuations. So the companies see merit in getting listed in the domestic market and offload some of their promoter holdings. Yet they would want to continue with the ownership rights and a 49-51 partnership makes that very risky.
There is also another unsavoury prospect. When the foreign investment cap is raised to 49 per cent, the existing foreign partner will stake the first right to pick up those shares and at a price that has been set before the valuations rose. In fact, as they had invested more in these joint ventures than the cap allowed, those can now be brought out in the open without any need to bring in fresh capital.
Why then, would a domestic partner want the cap to rise in this environment? Instead, he would rather insist, if at all there are pressures to go with a higher cap that it should come with a rider of only portfolio investors.
So it is an interesting picture. The companies make losses when they sell insurance, but still want to get listed as their investment income covers that up. In this arrangement the losers are obviously the insured.
It will be true swadeshi if the insurance cap is listed instead without any riders. Without powerful competition, the insured will find companies willing to talk shop. The owners will be jolted from the near monopoly they have created, much like the power distribution companies using regulatory cover.
Subhomoy is a Deputy Editor based in New Delhi.