Foreign shareholding in insurance firms' parent companies not to count for FDI: Finance Ministry

MUMBAI: International insurers, Prudential and Standard Life of the UK, can brush aside their worries about the prospects of not being able to raise their holdings in the Indian joint ventures. The finance ministry has said that foreign shareholding in parent companies of insurance ventures would not be counted as overseas ownership for computation of foreign direct investment in the insurance ventures.

The clarification from the ministry comes after many firms complained about the confusion created by the earlier government view that the insurance ventures have to be managed and controlled by Indian firms even though foreigners were permitted to raise their stakes to 49 per cent from 26 per cent.

Earlier, foreign ownership in a firm was calculated by also taking into account the proportion of overseas holdings in the parent firm. If foreigners owned half of the parent company and 50 per cent in the subsidiary, then foreign holdings in the subsidiary would be computed as 75 per cent. But not so anymore, at least when it comes to insurance firms founded by banks.

The Narendra Modi government came to power last year promising to lift growth, provide jobs and sweep away archaic rules holding back business and investment. His government also promised to make rules simpler and easier for foreign investors and insurance bill allowing foreign ownership of up to 49 per cent in Indian insurance companies was a key item on the agenda. But the passage of the bill has been followed by heartburn due to the clause on Indian ownership and control.

To add to the confusion, the Insurance Regulatory and Development Authority of India (IRDAI) had said on June 8 that "every insurer being an Indian insurance company and who have already been granted certificate of registration for carrying on insurance business in India shall ensure the compliance of Indian owned and controlled as specified in Section 2(7A) of the Act within six months from the date of notification of these regulations."

"Provided that the manner of computation of foreign holding of such Indian promoter or Indian investor company shall be in accordance with clause (p) of rule 2," said the notification from the department of financial services, Ministry of Finance.

Clause (p) of rule 2 says that total foreign investment in an Indian insurance company would be the sum total of direct and indirect foreign investment by foreign investors in such company, calculated in accordance with IRDAI regulations. However, it would make it difficult for foreign promoter in insurance JVs like Shriram with exposure to parent company to increase stake up to 49 per cent . Sanlam, the South African insurer which runs a joint venture, plans to raise its stake in the holding company Shriram Capital. Hence, Sanlam would not be able to raise its holding in the insurance subsidiary.