Indian insurance market opens up to foreign investors

31 March 2015

By  Mukesh Rajani

You would think it would be a marriage made in heaven - the UK’s strength in financial services coupled with the swelling middle classes of India and their growing appetite for financial products and services.

But restrictions on foreign control of companies have limited the involvement from UK and other corporate investors. Until recently, foreign ownership of insurance companies was limited to 26%, a holding that makes you, by definition, a minority shareholder with limited control if not influence on strategy. Some UK businesses have complained of ‘jam tomorrow’, capital intensive experience where they’ve felt they have been bank rolling the growth of the Indian insurance sector without fully sharing in the significant upside.

That the quota has been raised to 49% under Prime Minister Modi’s reform agenda is a great leap forward. And companies who structure their entry into the market correctly can build economic interest of up to 74%, while control rests with Indian partner.

To understand this opportunity, UK boards and strategy departments will look at the experience and models adopted by the telecoms sector.

Getting from 26% to 49%, or higher, requires a lot of negotiation, valuation and due diligence to build the board level confidence for an investment decision that will take the company into India for the long haul. Foreign insurance investors will have to comply with and get the permission of FIPA (Foreign Investment Promotion Board) and IRDA. Above all, companies will still need to hone the right entry strategy into a market so very different from the UK.

Despite the challenges, India looks attractive to UK insurers right now. With China slowing, oil and commodity prices low and parts of Europe on low growth mode, India represents an opportunity for significant growth and an attractive proposition for investors. India’s changing demography, in particular the exponential growth of its middle-class, increasing financial literacy, the drive for financial inclusion, insurance awareness coupled with a rise in domestic savings are expected to support growth of the insurance sector in the next few years. Corporates are already looking at them. Lloyd’s of London is, for example exploring the possibility of entering the Indian insurance sphere – perhaps signalling the beginning of a new chapter in the Indian insurance industry. The insurance broker will also be a significant beneficiary of these changes as with the re-insurance sector (with the new law permitting foreign re-insurers to now operate re-insurance business in India through a branch office structure). It’s time to look at India seriously once again

 

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