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As the cap on FDI in insurance sector has remained stagnant at 26%, the companies are now funding equity through the holding company
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As the cap on FDI in insurance sector has remained stagnant at 26%, the companies are now funding equity through the holding company
India (PaisaWaisa) July 10, 2008:The limit of foreign direct investment (FDI) in insurance remained stagnant at 26 per cent. The speculations of increasing it to 49 per cent is in the cold store. Several promoters are finding alternatives to bring in foreign money through the holding company. Despite the shielding on FDI, companies are finding substitutes to fund equity through Indian promoters through the private equity route in the holding company. Although FDI in India is capped at the limit of 26 per cent, there are several indirect ways to fund equity through Indian promoters. This funding is done usually in the form of private equity investment in the parent company with the understanding that the money would be used in the life insurance sector.
In India, 21 insurance companies(life) have already set up shop while 4-5 more are in the way of entering the market. Though there is the restrictions on foreign holding, more than six companies have a paid-up capital of over Rs 1,000 crore, and several life insurers are expecting to invest over this amount. In case of joint ventures like Bajaj Allianz, the foreign partner has poured the additional capital by way of a higher premium in return for a deal which allows the foreign partner to increase its stake at a fixed price. In this way, promoters of life insurers have been able to raise funds based on multi-billion dollar valuations despite the FDI cap.
In the global life insurance market companies use ‘embedded value’ for valuing insurance businesses during M&A deals and for the management compensation. The worth of an insurance company also depends on the future stream of earnings through present business and in this way it is different from other businesses. Embedded value is calculated by taking into account the future profits and liabilities after deducting the frictional losses. Even the use of this embedded value measure has evolved with global insurers moving Market Consistent Embedded Value(MCEV) from the European Embedded value model.
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