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Home / IRDA Update 

IRDA to exclude FII holding in calculation of FE cap

The first official indication that the government is proposing to exclude the FII holdings from the calculation of foreign equity came from reports that the government is inclined to exclude the FII stake from the calculation of 26 percent foreign equity cap set for the insurance sector.

However a caveat added later shows that the treatment will be extended only to FIIs whose subsidiaries do not have an interest in the insurance sector. However this might not constitute exactly good news for a company like HDFC where Standard Life has a shareholding, both as a JV partner as well as a FII. The combined shareholding of Standard Life through the FDI and FII route in HDFC already exceeds the foreign investment cap of 26 percent set for the insurance sector.

Ever since the government has set the 26 percent sectoral cap for foreign investments, there has been a debate on what will happen to financial market players like ICICI and HDFC which have foreign equity stakes exceeding 26 percent.

The rationale behind IRDA's thinking is probably that FIIs generally take equity for investment purposes, instead of management control. IRDA may not be inclined towards allowing FIIs to acquire equity stake in domestic ventures. As long as the FII-FDI combination is not used to wrest management control, FII investment is all right. But if the foreign insurer seeks to circumvent the sectoral cap by trying to control the company indirectly through FII positioning, then it stands no chance.

The rules made it mandatory for all companies to get IRDA's permission for the transfer of shares beyond one percent of the company's share capital. The IRDA Act requires insurance rules to be finalised in consultation with the advisory committee and are expected to take care of overseas mergers and acquisitions in insurance ventures and their impact on the Indian market.

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