M&A Critique
FDI in Insurance Upt 26 Percent Allowed Via Automatic Route

FDI in insurance upto 26 percent allowed via automatic route

The government on Friday said up to 26 per cent Foreign Direct Investment (FDI) in insurance companies will be allowed through automatic route, as it notified rules to increase foreign direct investment ceiling in the sector to 49 per cent.

The rules have been prepared based on extensive consultations with all the relevant departments and organisations, the Finance Ministry said in a statement.

FDI proposals up to 26 per cent of the total paid-up equity of Indian insurance company shall be allowed via automatic route, and FDI proposals which take the total foreign investment above 26 per cent and up to the cap of 49 per cent shall require FIPB approval,” it said.

In December last year, the government had issued ordinance to increase the FDI ceiling in the insurance sector to 49 per cent from earlier 26 per cent.

According to the rules, foreign equity investment cap of 49 per cent is applicable to all Indian insurance companies.

The companies, the Ministry said, should not allow the aggregate holdings by way of total foreign investment in their equity shares by foreign investors, including portfolio investors, to exceed 49 cent of their paid-up equity capital.

They should also ensure that “ownership and control” shall remain at all times in the hands of resident Indian entities as referred to in these rules.

The cap of 49 per cent would also apply to insurance brokers, third party administrators, surveyors and loss assessors and other intermediaries.

The rules incorporate recent amendments to the law into the standing/prevalent practices being followed hitherto with respect to the treatment of foreign investment in Indian Insurance Companies, the Ministry added.

The Insurance Laws Amendment Bill, 2008 could not be taken up for discussion despite being approved by the Select Committee of the Upper House due to disruption in Parliament.

Foreign Portfolio Investment in a company would be governed by the relevant provisions under FEMA Regulations, 2000 and provisions of the Securities Exchange Board of India (Foreign Portfolio Investors) Regulations.

Any increase of foreign investment of an Indian insurance company shall be in accordance with the pricing guidelines specified by Reserve Bank of India under the FEMA.


FTIL appeals to shareholders to oppose NSEL merger draft order

Financial Technologies India Ltd (FTIL) has appealed to its shareholders to oppose the government’s plan to merge the company with its unit National Spot Exchange Ltd (NSEL), hit by a `5,574.35 crore fraud in 2013.

In a letter sent to BSE, FTIL chairman Venkat Chary said that all shareholders are entitled to “object to the forced amalgamation of NSEL with your company (FTIL) by exercising your right of opposition under Section 396 of the Companies Act, 1956”.

“We request you as a responsible owner of your company to send to MCA (ministry of corporate affairs), your genuine, bona fide and reasoned objections to the draft order,” it added.

The letter also highlights the fact that it has `2,000 crore in cash, and debt of `475 crore. On 21 October, the government issued a draft order suggesting that FTIL be merged with NSEL in public interest. The merger would mean FTIL would assume all the liabilities of the commodities exchange and become party to all the contracts and agreements entered into by NSEL.

The government has said the order would be finalized after it considers feedback from stakeholders and the public.

The merger of FTIL and NSEL has been proposed under Section 396 of the companies law, which empowers the government to order such a union when it is deemed to be in public interest.

This is the first time that the government has invoked the provision in a case involving non-state entities.

The merger was recommended by commodities market regulator Forward Markets Commission (FMC) and has also been demanded by investors affected by the fraud at NSEL.

After FTIL challenged the draft order in the Bombay high court, the court ruled that the government can first pass the final order and the aggrieved party can then challenge it legally.

Separately, the company has also challenged the FMC order that declared FTIL unfit to hold a stake in any exchange.

FTIL, in its letter to the shareholders, said the “forced amalgamation of NSEL with FTIL is without even seeking the consent of the stakeholders, including shareholders and creditors, of both the companies.

Four of FTIL’s creditors—Union Bank of India, Syndicate Bank, DBS Bank Ltd and Standard Chartered Plc—have also moved the Bombay high court, opposing the government’s decision to merge NSEL with FTIL.

The four banks, in their plea, said their dues should first be secured before assets of the company are utilized to pay off NSEL’s liabilities.

Apart from the lenders, Ravi and Bharat Sheth, who collectively own an 8.1% stake in FTIL, have also filed a writ petition challenging the draft order.

Supreme Court senior laywer H.P. Ranina said FTIL was only bringing to the shareholders’ notice that if they have any reservations about the proposed merger, they can make themselves heard by the authorities, who may consider the objections when they pass the final order.

This is a common practice in such cases, he said.

While the government has pushed for a merger citing public interest, FTIL vehemently opposed the plans in the Mumbai high court.

On 4 February, appearing on behalf of FTIL, senior lawyer Abhishek Manu Singhvi said 781 wealthy individuals had lost around `4,000 crore in the NSEL irregularities.

“A provision (section 396) has been used…for effective recovery of money. It is a compulsive coercive merger of two corporate entities. Merger by loading the liabilities by compulsion. What about the 63,000 shareholders of FTIL? These 781 people must be very, very special that such an extraordinary power has been invoked,” said Singhvi.

FTIL owns 99.99% of NSEL, on which trading was suspended after a payment crisis—which later turned out to be a case of fraud—came to light in July 2013.



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