Sunday, December 23, 2007

Private life insurers - another scam in the making?

The private life insurance industry has sought an additional four-year grace period to carry forward its losses since most insurers have failed to break even, even after eight years of operations. At present, losses can be carried forward only up to eight years. The industry has also sought a separate limit u/s.80-C of IT Act for long-term savings.

But I chuckle and split my gut over something else. They face a problem which LIC never had. Current provisions mandate that insurance companies must list within 10 years of operations. Under Section 6AA of the Insurance Act, 1938, Indian promoters have to scale down their stake to 26% within 10 years of operations. This amendment is being considered by the group of ministers (GoM) set up to examine the comprehensive insurance legislation.

It's catch 22. Insurance companies, which are into their eighth year of operations, might not be ready to go public yet, since they are yet to break even. SEBI mandates a company may list only after three years of registering profits. Insurance companies, however, are already being valued at skyrocketing levels. For instance, ICICI Financial Services — the proposed holding company — has been valued at more than $10 billion post-issue. But its earnings are still negative. How did they get such a lucrative valuation? Who valued them? No answers.

That’s the catch. They've taken the extension of time beyond eight years for granted. Their hand picked I-Bankers have arrived at a valuation based on fees they got. But they can't justify that valuation now since they continue to make losses. If they go public now, they may have to pay the investors to buy their shares. It’s going to be eight years now and they are yet to break the stranglehold that LIC has over its customers and turn cash flow positive. Meanwhile these guys spend millions on advertisements to spread insurance awareness. But clearly, it's LIC that's getting the mileage.

Going by the trend, they will not make a profit in another 10 years or so. So their strategy is, keep running to the government for extension of time. The question is, how long should the government forego its tax revenues to subsidise private insurers’ poor performance…? What public good do they stand for? Should the government wimp out just to enrich Indian promoters when they off-load their stakes? How else do you define a scam?
Mr.Chidambaram, don't you see the bullshit meter turning red...?

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