FDI limit hike to boost valuations of insurance firms

The much-awaited foreign direct investment (FDI) cap hike in insurance, from 26 to 49 per cent, has set the stage for Indian promoters to unlock value by reducing their equity stakes.

The holding of Indian partners in insurance ventures ranges from 74 to 100 per cent. It put tremendous pressure on these promoters to pump in large amounts of capital as the nascent industry moved from a high-growth to a consolidation phase in the past decade. Insurance is a capital intensive sector. Take ICICI Prudential Life, a subsidiary of ICICI Bank, for example. It has a staggering capital base of Rs 4,796 crore, way higher than that of its parent (Rs 1,158 crore).

Undoubtedly, the foreign joint venture (JV) partners would be the natural buyers of the Indian promoters' stake. The global insurers had inserted a clause in the JV agreements to hike their stake once the government relaxes FDI limits by buying from existing partners or issuance of fresh equity in the market. These deals will take place at the mutually agreed price, which is a combination of book value and fair market value.

Interestingly, foreign institutional investors (FIIs), too, can be included in the composite cap of 49 per cent. "The FIIs have a greater appetite for investing in long-term insurance businesses as compared to Indian institutional investors," says Aneesh Srivastava, Chief Investment Officer at IDBI Federal Life Insurance Company Ltd. Indeed, FIIs could come in if the FDI player is not too keen to hike its stake from 26 per cent.

Meanwhile, the possibility of initial public offering (IPO) by profitable insurers have increased big time. There are half a dozen companies that have completed the mandatory 10-year operational period to be eligible for an IPO. "The stock market always values a company on forward multiples, which gives a company a better pricing," says an insurer. In fact, the negotiated deals done by insurers for small minority deals will become a starting point for price discovery. HDFC Life, for example, sold around one per cent stake to the Azim Premji Trust, which valued the private insurer at Rs 20,000 crore.

HDFC Life is already engaging with its partner Standard Life for an IPO. And if it happens, the private sector insurance industry will have a market benchmark to follow. A higher valuation will allow companies to raise more capital at a premium.