Banks may be allowed to form insurance arms

NEW DELHI: Banks are likely to be allowed to form subsidiaries to hold their stake in insurance joint ventures, according to the chairman of the Insurance regulator, IRDA. However, non-banking promoters of insurance joint ventures looking to form holding companies to fund these businesses, may find it difficult to do so. The IRDA view is significant, given the Foreign Investment Promotion Board is meeting on Friday to consider ICICI Bank’s proposal to transfer its stake in its insurance joint venture to a subsidiary holding company. ICICI Bank also wants to induct 24% foreign direct investment in the subsidiary. State Bank of India also proposes to set up a subsidiary for all its non-banking arms, including its insurance venture. “While banks are constrained due to a limit on their exposure to insurance ventures, their need to establish a holding company is justified. For all other promoters which are not banks, whether the holding company route is really required will have to be considered on a case-to-case basis,” CS Rao, chairman, IRDA said. Banking regulations will take precedence over insurance in this case, he said. However manufacturing or service sector companies, should continue to fund their insurance business without floating a holding company. Under Section 19 (2) of the Banking Regulation Act, the investment by a bank in a subsidiary company, should not exceed 10% of the bank’s paid-up capital and reserves. This would constrain a bank’s ability to expand the capital of its insurance venture. Vesting ownership of the insurance venture in a holding company that could draw funds from other investors as well is one way of getting around this constraint. IRDA regulation stipulates that an Indian promoter of an insurance company should not be a subsidiary company under the Companies Act. Banking companies are differently placed. Already, companies including Max India and Bharti have established special purpose vehicles to act as holding companies to fund their insurance ventures. Bajaj Allianz is also expected to come under a holding company - Bajaj Financial Services - controlled by an overall parent Bajaj Holdings under the proposed demerger plan. Officials at Bajaj Allianz refused to comment on the status of the proposed holding company. In a response to an email, a spokesperson said, "the decision of Bajaj Auto to form a holding company for all its financial services is a part of the demerger process and not otherwise."
On the decision of the Foreign Investment Promotion Board (FIPB) which has so far not cleared ICICI Bank's proposal to sell equity of its holding group ICICI Financial Services, the IRDA is of the view that it is more important to serve the larger interest of the industry than starving ICICI's insurance ventures of funds. ICICI has proposed to set up ICICI Financial Services as a wholly-owned subsidiary to hold its investments in insurance and mutual fund business. The bank had applied for permission from FIPB to induct 24% foreign investment in the holding company. “Rules flagged by the FIPB distinguishes between a subsidiary versus a company. Though the registration principles under the IRDA specify that a company and not a subsidiary can hold stake in an insurance venture, this difference is not spelt in the law,” Mr Rao said. Besides, approval of ICICI bank’s holding company does not mean the bank has ceased being a promoter in its insurance ventures, he clarified. The FIPB is likely to again consider the ICICI holding company proposal on July 13. The insurance division in the finance ministry and the IRDA have said the proposal does not violate foreign holding limits for the insurance sector. ICICI problem arose as it was felt by some officials that foreign investment in a holding company was intended to circumvent the ceiling on foreign equity in insurance companies. As per IRDA norms, this conflict arises only when foreign promoter of an insurance company also has a stake in the holding company apart from the joint venture

source:Economic Times