FDI is good cholesterol, don’t oppose it

The financial case

At the policy level, we need to encourage FDI. The restrictive era in foreign investment policy was consistent with a high level of trade protection and a wave of economic nationalism that perceived foreign investment as loss of sovereignty and foreign acquisition. We have put that era firmly behind us. The mindset now must change. FDI brings to the recipient country not only capital and foreign exchange, but also managerial ability, technical knowledge, administrative organisation, and innovations in products and production techniques, all of which are scarce commodities. These benefits are not immediately apparent in the economy because they take time to develop. However, there is enough empirical evidence to prove that with FDI, the economy is better able to provide higher productivity and bigger job pools.

The accounting case

If India is open to foreign investment, a 49 per cent stake represents a reasonable level of engagement for the foreign partner. It is a minority stake and yet it is sufficient enough for the foreign shareholder to see the investment as meaningful. Foreign investors have a variety of locations to choose from and the attractiveness of a country as an investment destination needs to be firmly established. I believe at least a 49 per cent holding lends greater strength to the local entity’s operations. It allows the financial statistics of the foreign company to be consolidated in a meaningful manner and for the size and scale of the business to be reflected properly in its global balance sheet.

The business case

Given the imperative of attracting FDI for increasing India’s GDP growth rate, we need to lower barriers and, in cases where we believe the barriers must stay, have watertight arguments in favour of retaining those barriers. In my view any such barrier cannot be justified in the case of insurance.

Consider this: the opening up of the sector has galvanised the sector, raised insurance awareness, introduced more modern products and brought about a significant improvement in the quality of face-to-face selling. Moreover, Life Insurance Corporation of India too has benefited from the competition. Insurance deregulation has also meant that the Indian customer gets access to global expertise in a specialist industry. Besides, there needs to be some harmonisation in FDI laws governing financial services. Currently there is no sectoral cap on mutual funds, while there is a 74 per cent cap on FDI in private banks. Why then should there be a 26 per cent cap on insurance? Moreover, life insurance is a special industry. It can’t be financed by debt; it requires shareholders to put in capital.

Life insurance is a long gestation business and requires significant amounts of capital. A significant portion of the capital deployed is put aside for maintaining the required solvency margin. Some recent estimates reveal that to build a company the size and reach of the Life Insurance Corporation of India would require anything between Rs 15,000 crore-Rs 20,000 crore. The total capital deployed by the dozen life insurance companies is around Rs 3,300 crore. The potential for growth is enormous and Indian capital markets are not deep enough to support this exponential growth. FDI can effectively bridge that gap.

The company law case

There is no material difference from a company law perspective between a 26 per cent and a 49 per cent equity limit. It’s actually detrimental to India to keep it at 26 per cent. At 49 per cent you have more capital coming in. So, why would you not encourage more capital infusion particularly when you give the foreign investors not one more thing than they have already at 26 per cent?

The public case

India is a country that lacks social security systems and people are grossly under-insured. They have traditionally bought life insurance for tax-saving and investment purposes. The awareness that at its heart, life insurance is about securing the future of your family is just about beginning to seep in. Given that life insurance can save families from economic strife, there should be rapid development of this noble business.

Capital infused into life insurance businesses can be invested in long-term infrastructure projects in the country and the need for investment into those projects can scarcely be over-emphasised. Generation of employment — both direct and indirect — is remarkable enough. Insurance is best sold face-to-face the world over and privatisation estimates are that more than 125,000 people have become agents and another 20,000 are directly employed in insurance companies.

Points of conflict

So, what are the grounds on which FDI in insurance is being opposed? From the statements being made, here’s what I have gleaned: foreign insurers will take out money and new life insurance companies are only targeting the creamy layer of society. Let me address those concerns specifically:

• Taking out money: Life insurance is a long gestation business and companies only become profitable in seven to eight years. Therefore only companies with a long-term outlook will do business. All investible funds of customers have to be invested in India. The question of taking money out doesn’t arise. Moreover, there are stringent laws to safeguard the funds of policy-holders.

• Creamy layer: To effectively reach the benefits of life insurance to rural areas, private companies first need to find reasonable success in urban areas. The natural progression will be from urban to rural, not the other way round. The earnings in the urban market can be effectively transferred to rural markets once the life insurance business is in good health. That apart, the regulator has put in place stringent rural and social compliance targets that need to be met.

So, foreign capital will allow the people of this country to enjoy higher rates of economic growth, employment and a higher standard of living. Insurance, telecommunications and civil aviation will benefit from the Finance Minister’s proposals. Don’t stymie that growth. Say yes to good cholesterol.

The writer is CEO and managing director of Max New York Life Insurance Company.