Foreign allies can hike stake in insurance JVs with PSBs

While MNCs get the option to hold up to 49% after change in FDI laws, PSBs will retain 26% stake. Also, the stake sale will be at ‘current’ valuation, reports Sangita Mehta

FOREIGN partners have been given the option by public sector banks to significantly raise their equity stake in their respective insurance joint ventures. The foreign companies, currently holding 26% in JVs, will have the right to buy additional shares to reach 49% holding soon after regulations allow higher FDI in insurance. However, the agreement also says state-owned banks would retain their equity stake at 26% — the critical level which ensures the veto power — at all point of time. But, unlike the Bajaj Allianz deal, where Bajaj Auto has a pact with the German insurer to sell shares at nominal value, state-owned banks will sell at a price based on valuation of insurance venture at that point of time. Such agreements have been struck by most private players. At present, FDI holding in insurance venture is capped at 26% and the government has proposed to raise it to 49%. For instance, the MoU of the IDBI-led insurance venture with Fortis stipulates that the foreign partner will be allowed to raise the equity stake to 49%, but it also states that IDBI will always hold 26% stake in the venture. Currently, IDBI holds 48% stake while South-based Federal Bank and Fortis have 26% each. Both IDBI and Federal Bank will gain when they sell their shares because it would be sold at a premium. Same is the case with the Allahabad Bank-led insurance venture with Sompo, which also has Indian Overseas Bank, Karnataka Bank and the Burman group as its partners. Here, the MoU stipulates that Allahabad Bank and IOB will jointly hold at least 26% in the venture while Sompo will be allowed to raise its stake to 49%. At present, Allahabad Bank holds 30%, IOB has 19%, Karnataka Bank has 15% and Burman group has 10% with Sompo holding 26%. The MoU is slightly different in case of Bank of India led insurance venture where the bank has 51% stake, Union Bank has 23% and Dai-chi has 26%. Here, the MoU says that only the foreign partners will be allowed to raise their equity stake as and when the regulations permits, but even Union Bank will hike its stake to the critical level at 26%. BoI will bring down its stake to 30% and Dai-chi will hold 44%. The MoU will also allow Union Bank to raise its stake at par while the foreign partner will have to pay a premium based on the valuation arrived at that time. This clause is also aimed at protecting Union Bank interest as minority shareholder. It may be recalled that Andhra Bank had earlier walked out of the insurance deal with BoI because it was not happy holding less than 26% stake in the company. Sources said that HSBC, the foreign partner, in the case of the Canara Bank-led insurance venture would be allowed to raise it stake to 49% while Canara Bank will continue to hold 26% at all point of time. At present, Canara Bank holds 51% while Oriental Bank of Commerce has 23% in the tie-up. Meanwhile, Bank of Baroda, which recently tied up with Legal & General, has to yet finalise its third partner for the venture.

Source: The Economic Times, 6th June '07 (Sangita Mehta)