An Indian company with foreign equity held by entities other than its foreign partners in its insurance joint venture can now breathe easy. Such equity will not be counted while calculating the foreign investment cap of 26 per cent.
This implies that the 26 per cent ceiling will not include the stake held by those foreign shareholders in the Indian promoter company who have not subscribed to the equity of its insurance joint venture.
In theory, the cumulative foreign holdings in an insurance joint venture can now climb beyond 50 per cent, but management control will remain in Indian hands.
This follows a ruling by the Insurance Regulatory & Development Authority, which went into the acquisition of Max India shares by Parkville Holding and Ensley, two Mauritius-based entities. Max India holds 74 per cent in Max New York Life Insurance, with New York Life holding the remaining 26 per cent.
The regulator has also said holdings of non-resident Indians, overseas corporate bodies and multinationals in a foreign institutional investor or a mutual fund will not be counted towards foreign equity even if they have invested in an insurance venture.
An exception will, however, be made if the FII is one of the foreign promoters of the insurance venture. Senior government officials said the proposal had been approved by the Foreign Investment Promotion Board.
It has been recommended for clearance by Finance Minister P Chidambaram. Parkville Holding is subscribing to 10 million shares of Max India for Rs 200
The IRDA's ruling is expected to affect the fate of most private insurance companies as international players hold 26 per cent stake in the ventures. Sahara Life and Reliance General are the only insurance companies without foreign partners.
At the time of granting a licence to HDFC Standard Life, the IRDA had stipulated that Standard Life could not hold 26 per cent in the joint venture as it had also subscribed to HDFC's equity. As a result, Standard Life's holdings in the insurance venture were kept at under 20 per cent.
The regulator's interpretation of the rules is expected to help Indian promoters infuse capital in insurance companies. Most players in the insurance business have been seeking an increase in the foreign investment cap from 26 per cent to 49 per cent, citing pressures on infusing capital.
The rules stipulate a solvency margin of 1.5 times, requiring promoters of insurance firms to continuously expand the equity base as the business grows.
Lid taken off
