Enhancing diversification

February 2021 saw a new beginning in the Indian insurance field, when New Delhi began implementing a crucial policy initiative of raising the foreign investment limit for insurance companies in India from 49 per cent to 74 per cent. Ipso facto, this has paved the way for foreign ownership and control in Indian insurance companies.

The change must be read in the context of an amendment to the Consolidated Foreign Direct Investment Policy (FDI Policy) in 2020, which increased the foreign investment limit to enable foreign ownership and control in insurance intermediaries. The government first decided to open the insurance sector to foreign players in 2000 and permitted a 26 per cent FDI. In 2015, it increased the FDI limit to 49 per cent. In 2016, all investments in Indian insurance companies up to 49 per cent exempted from government approval under the Automatic Route.

Following the amendment to the Insurance Act, 1938, effective from 1 April 2021, the definition of an Indian insurance company was modified to increase the permissible foreign shareholding to 74 per cent. On 15 June 2021, the Department for Promotion of Industry & Internal Trade (DPIIT) subsequently released press note no. 2 of 2021, which amended the FDI policy to allow equity investments by foreign persons in Indian insurance companies up to 74 per cent of the share capital under the Automatic Route. However, such investments continue to be subject to approval or verification by the Insurance Regulatory and Development Authority of India (IRDAI).

The latest move by the Sanlam group of South Africa must be read in the context of the changes in FDI rules for the insurance companies in India. The group had recently announced that it was stepping up its shareholdings in Shriram General Insurance Company (SGIC) and Shriram Life Insurance Company (SLIC), a part of the Shriram group.

SGIC and SLIC are joint ventures in India between Shriram Capital and Sanlam, licensed with the Insurance Regulatory & Development Authority of India. Sanlam has been in partnership with Shriram group since 2000. The increased holding of Sanlam in these two Shriram group companies has come about through a couple of transactions. Firstly, Sanlam acquired an effective 6.29 per cent in SGIC and 7.04 per cent in SLIC from TPG India Investments II Inc. Secondly, it further acquired an effective 4.45 per cent in SGIC and 4.98 per cent in SLIC from the Shriram Ownership Trust (SOT). The two deals were done through Sanlam Emerging Markets Mauritius Limited.

Increasing stake

Simultaneously, the Sanlam group also sold a part of Sanlam Life’s direct holding in Shriram Finance Limited (SFL) on 28 March at the prevailing market price. The proceeds of the sale of

SFL shares are to be used to part-fund the increase in its stake in the life and general insurance ventures of the Shriram group. “On 28 March, Sanlam Life sold 1.59 per cent (of its 2.01 per cent direct holding) in SFL to Shriram Value Services (SVS) at the listed market value of R2,386 per share, resulting in gross proceeds of R1,427 crore,” Sanlam said.

SVS is a subsidiary of Shriram Capital Private Limited (SCPL) and Sanlam owns 40.70 per cent of SCPL, with the balance controlled by SOT and its affiliated entities. “Sanlam owns an effective 26 per cent stake in SVS. The SFL Disposal will result in a net decrease of Sanlam’s effective economic shareholding in SFL from 10.19 per cent to 9.54 per cent,” it said.

“The consideration payable to acquire the combined 10.74 per cent in SGIC and 12.02 per cent in SLIC will be partially funded using the net proceeds from the disposal of the SFL shares. The balance consideration of ZAR2 billion will be funded using a combination of available capital resources,” a Sanlam notification said.

The South African conglomerate feels that these transactions “represent a unique opportunity for Sanlam to increase its stakes in SGIC and SLIC and achieve 50 per cent plus effective economic interest in the insurance entities”. The stake hike is expected to strengthen Sanlam’s position in India and enhance its geographic diversification and scale in Emerging Markets outside of Africa. Will this change trigger an organisational change and invest vibrancy in the management of these two insurance joint ventures of the Shriram group?

K .T. JAGAN NATHAN

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