Saturday, September 01, 2007

FDI phobia

The machinations for circumventing the 26% FDI limits in Insurance sector has taken a new turn with ICICI Bank’s proposal to transfer its 74% holdings in its insurance ventures to a holding company, ICICI Financial Services Ltd.

ICICI Bank owns 74 per cent each of ICICI Prudential Life Insurance and ICICI Lombard General Insurance, but the bank is 70.88 per cent owned by foreign investors. This means the effective Indian shareholding in the insurance subsidiaries is only about 21.54 per cent, against the FDI norm of 74 per cent Indian ownership.

If ICICI Bank transfers its stake in the insurance companies to the holding company and if that in turn sells a 24 per cent stake to foreign investors, then the effective Indian shareholding in the both the insurance companies will further fall to about 15.62 per cent.

While Finance Ministry has approved this back door hike in FDI ceilings, FIPB and RBI are not so sanguine about it.

I go that when color of money is increasingly losing its relevance in a globalized world, why should there be any ceilings at all? Be it Indian or Foreign Investor, so long as they are subject to TRAI & RBI regulations, there should be no problem. In fact FDI in insurance should be freely allowed since it covers risk and entry of a foreign investor enables cross-border distribution of that risk. Restriction stimulates the temptation to get around it by devising ingenious ways such as the holding company route, which on the surface is appearing rather innocuous. Or may be it is.

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