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1 share, 1 vote to help in getting FDI into insurance sector - The Economic Times

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1 share, 1 vote to help in getting FDI into insurance sector

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9 Jul, 2014, 05.20AM IST

By Sunil Sanghai
Concerns regarding ownership in insurance and pension sectors are holding back a muchneeded move to boost long-term foreign investment. While various solutions are being debated
to overcome the stalemate, some of the creative options that are gaining traction are
overlooking the whole purpose of the proposition, which is to get more foreign direct investment
One such idea is to restrict foreign investors' voting rights to 26 per cent while allowing them to
buy up to 49 per cent of the company, up from the present cap of 26 per cent. While on the
surface this may look to be the most obvious path forward, it will make FDI less attractive rather
than more. An FDI investment is more strategic than just a portfolio investment.
In addition to economic ownership, FDI investors look for real ownership and control of the
business, protection of their rights in all respects, and a reasonable involvement in the
business. Also, non-voting or restricted voting rights may impact the exit options for a foreign

One such idea is to restrict foreign investors' voting rights to

26 per cent while allowing them to buy up to 49 per cent of the
company, up from the present cap of 26 per cent.

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Another issue that remains unclear is the treatment of non-voting shares in the case of mergers and takeovers. Internationally, there are very
rare examples of international insurance companies with restricted voting rights.
In Thailand, non-voting shares are issued to foreigners, giving them a larger economic interest than their voting interest. Furthermore,
companies can pass their own shareholder resolutions to establish poison pills, which cap voting rights irrespective of economic ownership.
But almost all these schemes are company-specific resolutions and not enforced by law.
For example, an insurance company in Switzerland has adopted a rule in its Memorandum and Articles where voting rights of an individual
shareholder are capped at 10 per cent. In our country, we have maintained parity between economic and voting rights, regardless of the
domicile of the investor.
Only in the banking sector have we seen restricted voting rights, which too apply uniformly to all investors, domestic or foreign. The Banking
Laws Amendment Act 2012 applied a limit of 10 per cent voting rights across all banks, including PSU banks. However, economic ownership
in banking is also potentially capped at 10 per cent. Furthermore, the amendment also empowered the central bank to increase the voting
threshold to 26 per cent.
Historically, we have never seen differentiated voting rights between foreign and domestic investors. As a country, we have always offered a
level-playing field to all investors, without disadvantaging one against the other while maintaining caps on foreign ownership in certain strategic
A pure FDI route would certainly generate more international interest among investors and would also result in greater long-term stability on
shareholder rolls. Foreign investors are keen on an India entry as the insurance sector is showing a promising annual growth of 12-15 per cent
and is expected to touch $1 trillion by 2020.
If India's insurance penetration of 3.96 per cent of its GDP has to rise, foreign investment will have to play a major role. However, the insurance
and pensions industries are critical elements of our financial infrastructure and from a policy perspective. Thus, any concentration of ownership
is naturally bound to cause concerns. But there are other simpler and fairer ways to guard against undue influence than using laws to set up
complicated and iniquitous shareholder voting structures.
The aviation sector, which has recently seen a lot of activity in terms of foreign investment, provides one example. Foreign airlines are limited
to owning 49 per cent of Indian carriers, yet overseas investors have shown interest in the industry.




1 share, 1 vote to help in getting FDI into insurance sector - The Economic Times

Although their shares give them equal voting power to domestic investors, conditions on management control, board membership, etc ensure
that sufficient Indian oversight is maintained.
Another option could be for insurance companies to list themselves on stock exchanges through a public floatation, resulting in larger public
participation. In such a case, at least 23 per cent ownership should be allowed for FIIs, in addition to the 26 per cent foreign ownership already
existing through FDI. But, this only a second-best solution.
(The author is the Head, Global Banking, HSBC India. Views expressed are personal.)
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