Open sesame

SBI’s Bhatt: Value game

It's time to unlock value-in a tried and tested way. The largest bank in the country, the State Bank of India (SBI), is forming a holding company for two of its non-banking subsidiaries, SBI Life Insurance and SBI Asset Management Company. The idea of a separate holding entity is to free up the bank's capital for core lending and to also provide a focussed approach to the fast growing financial services businesses. SBI has taken a cue from the holding structure of the country's second-largest bank-SBI itself is the largest-ICICI Bank, which recently created icici Financial Services, which comprises the life & non-life insurance activities as well as the asset management business. ICICI Financial Services is valued at Rs 44,600 crore. Analysts have pegged the value of SBI's new entity at between Rs 25,000 crore and Rs 30,000 crore.

The life insurance business is all set to trigger a hiving off spree in the insurance industry because of its capital-intensive nature and also the mind-boggling valuations prevailing in this six-year-young sector. Like ICICI Bank's non-banking subsidiaries, SBI's two ventures have also been performers in the market. In a short span of five years, SBI Life emerged as the only private sector company to come out of the red in 2005-06. The fifth-largest SBI Life, in a partnership with French giant Cardiff, garnered a gross premium of Rs 1,075 crore in 2005-06.

SBI Asset Management Company, too, is raking in the moolah with assets under management of over Rs 20,000 crore. The AMC is already the sixth-largest player in the Rs 4 lakh crore mutual fund industry comprising close to three dozen players.

The holding company can now raise resources independently either through stake sale to a strategic partner or through an IPO, which was not permitted for standalone insurance ventures due to FDI restrictions. The holding structure to approach the primary market will come as a big relief to insurance subsidiaries like SBI Life and ICICI Prudential Life, both of which are growing at over 100 per cent in terms of gross premium income. "We would initially divest around 10 per cent to few strategic investors mainly to do the price discovery," O.P. Bhatt, Chairman, SBI, said at a recent press conference.

In the past, ICICI Prudential Life has made over a dozen capital infusions, taking its capital base to around Rs 2,000 crore. Similarly, SBI Life has infused Rs 75 crore as capital this year to take its total capital to Rs 500 crore.

Current FDI restrictions limit the foreign partner's equity contribution in an insurance venture to 26 per cent. ICICI Bank's model of hiving off the non-banking subsidiaries to free up capital and make them financially independent is fast catching on. And who knows, the other biggies like Bajaj, HDFC and Birla may also follow suit shortly.