Bloomberg News

AIG’s 13-Year Wait Gets Longer as Modi Rebuffed: Corporate India

August 14, 2014

India Infrastructure

Pedestrians pass a roadworks site during the morning rush hour in Mumbai. India needs about $290 billion by 2017 for public works to upgrade its infrastructure according to estimates by the nation’s Planning Commission. Photographer: Vivek Prakash/Bloomberg

American International Group Inc. (AIG:US) waited 13 years in India to raise its stake in a local venture from a maximum allowed 26 percent. That wait just got longer.

Opposition lawmakers, during the parliament session ending today, scuppered Prime Minister Narendra Modi’s attempt to revive a bill proposing a higher cap of 49 percent, dealing a blow to his campaign pledge to open the $1.8 trillion economy. The delay in the legislation, pending since 2008, is hampering the expansion plans of insurers including AIG, Standard Life Plc (SL/) and MetLife Inc. (MET:US)

“We have been waiting for more than a decade for this bill,” said Kaushal K Mishra, chief executive officer at Tata AIG General Insurance, the New York-based insurer’s partnership in India. “It is still not clear when the bill will be passed and in what form it will be. Many large international insurers are waiting for clarity on this.”

AIG is among the companies that see promise in the second-most populous country where insurance penetration, or premiums underwritten as a proportion of a country’s total economic output, is less than the global average of 6.5 percent. The delay robs Modi, who needs insurers’ funds to meet his infrastructure overhaul goals, of an opportunity to lure investors during a proposed visit to the U.S. next month.

Sent to Panel

Finance Minister Arun Jaitley today sent the bill to a 15-member select committee, which will submit a report in the next session of parliament.

Modi’s failure to see the bill through has raised doubts among investors over his ability to take politically sensitive decisions, said N. Bhaskara Rao, chairman of the New Delhi-based Centre for Media Studies. His government has also announced plans to revamp pension, land and labor policy, as well as start a uniform goods and service tax -- all of which require parliamentary approval.

“This just adds to the disappointment that the government is not moving fast despite getting a strong mandate,” Rao said. “Such instances reinforce the feeling especially in the investor community.”

The rupee has weakened about 1 percent against the dollar since Jaitley presented the budget on July 10. The benchmark S&P BSE Sensex (SENSEX) has slipped 0.6 percent from a record high reached on July 24, according to data compiled by Bloomberg.

Role Reversal

Efforts by former prime minister Manmohan Singh’s government to raise the investment cap were thwarted by rival political parties, including Modi’s BJP and the Communists, who argued that it isn’t in the interest of the Indian insurance industry.

The main opposition Congress party that originally introduced the legislation about six years ago, in a tit-for-tat role reversal, is now against it after losing to Modi in the elections in May. The BJP lacks a majority in the upper house of parliament, the Rajya Sabha, where the proposal has stalled.

The clash is hurting the economy, said Prasun Gajri, chief investment officer of HDFC Standard Life Insurance Co., the Mumbai-based partnership of the Edinburgh-based insurer.

“A robust insurance sector will increase financial savings and help in mobilizing the much needed long-term funds for infrastructure development,” he said. “Growth in this segment will support the economy’s expansion.”

Poor Infrastructure

India needs about $290 billion by 2017 for public works to upgrade its infrastructure according to estimates by the nation’s Planning Commission. The poor quality of roads, bridges, ports, rail and other facilities, ranked below those in Guatemala and Namibia in a World Economic Forum survey, is hindering an economy that expanded 4.7 percent in the year ended March, near the slowest pace in a decade.

Insurers typically invest in long-term government and corporate bonds, a crucial source of funds used to finance infrastructure projects. Indian insurance companies, most of which are state-controlled, held about 20 percent of government securities as of end-2013, according to data provided by the finance ministry.

Asia’s third-largest economy had 24 life insurance companies and 28 non-life insurers by end-July, according to the Insurance Regulatory and Development Authority. Twenty life insurers and 17 non-life insurers had received foreign investments as of March 2013, IRDA data shows.

Controlling Stake

“Most international companies will probably increase their stake in Indian ventures,” T R Ramachandran, CEO of Aviva Life Insurance Co. India said by phone from New Delhi. “Passing the insurance bill also frees up the regulator’s hands to reform the sector.”

While a controlling stake is the goal for many foreign insurers, the proposed 49 percent is still better than the current 26 percent, according to Vishal Narnolia, Mumbai-based banking analyst at SMC Global Securities Ltd.

“Lack of head room to hold a more significant share in the Indian joint venture and problems that they were facing in home markets forced some large overseas insurers to exit India,” said Narnolia.

Australia’s AMP Ltd. (AMP) sold its holdings in a local venture to billionaire Anil Ambani-controlled Reliance Capital Ltd. in 2005. AMP’s then chief executive officer Andrew Mohl said the venture was “several years” from being profitable.

Rising Demand

New York Life Insurance Co. quit an Indian joint venture in 2012, three years after its local partner Max India Ltd. indicated it would sell its 23 percent holdings to the biggest U.S. life insurer owned by policyholders, should India change its foreign direct investment rules.

Companies including Aviva Plc (AV/) and Nippon Life Insurance Co have stayed put in the South Asian country. They are betting demand for pension, health and other protection products will increase with higher per capita income, rising average life expectancy, the emergence of nuclear families as well as a reduction in the average size of households, Charles Graham, an analyst with Bloomberg Intelligence, wrote in a research note dated July 14.

India’s insurance sector is “investment starved,” Jaitley said while presenting his budget that proposed raising the limit.

Insurance penetration in India has slipped every year from 5.2 percent in 2009 to 3.96 percent in 2012, the latest data provided by IRDA show. That is still the highest among the BRIC nations.

India requires as much as 600 billion rupees ($9.8 billion) in insurance till 2019 to sustain its growth trajectory, said Monish Shah, a Mumbai-based senior director at the local unit of Deloitte Touche Tohmatsu.

“India presents a huge opportunity and this was a good time to raise the limits and bring in the foreign investors,” Shah said. “Any uncertainty on such policy matters is going to adversely affect investor confidence.”

To contact the reporters on this story: Anto Antony in Mumbai at aantony1@bloomberg.net; George Smith Alexander in Mumbai at galexander11@bloomberg.net

To contact the editors responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net Sam Nagarajan, Dick Schumacher


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Companies Mentioned

  • AIG
    (American International Group Inc)
    • $55.24 USD
    • -1.09
    • -1.97%
  • MET
    (MetLife Inc)
    • $55.97 USD
    • 0.08
    • 0.14%
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