Several international insurance firms that operate in India through joint ventures exercise control over them, despite having only a 26 per cent stake. This is the maximum permissible foreign investment.
Business Standard and two researchers have come across at least three such instances based on filings by the insurers. In these cases, the decision-making powers of the majority shareholding Indian promoter is neutralised by agreements signed at the time of the JV's incorporation.
"It is common practice to agree upon some super majority items, where the foreign entity has a larger say. Technically, such agreements contradict FDI policy, but they are not illegal. They are done through contracts. FDI policy does not clarify on such contracts," said Manoj Kumar, senior partner of corporate law firm Hammurabi & Solomon.
Take, for instance, Bharti Axa Life Insurance, the JV floated by telecom major Bharti and French financial services firm Axa. It functions within an agreement that allows the foreign partner to call the shots despite holding only 26 per cent.
Bharti Axa's articles of association say that for any decision to be approved, a majority opinion of the directors alone is not sufficient, if it does not include an "affirmative vote of the Axa director". Domestic laws allow any shareholder with a 26 per cent stake to veto proposals, though decisions are based on the majority opinion.
Bharti holds 40 per cent and Axa 22.22 per cent stake in the JV. The remaining shares are with a special purpose vehicle formed by Bharti Axa First American Securities Pvt Ltd which holds 37.78 per cent. Since the SPV is 90 per cent owned by Bharti and 10 per cent by Axa, the total shareholding of the foreign partner technically falls within the 26 per cent FDI cap.
The Insurance Act bars any foreign investor, by way of FDI or through foreign institutional investment, to hold more than 26 per cent in a local venture.
Initially, the Insurance Regulatory & Development Authority stressed on foreign investors paring their stakes in local insurance arms if they also held a stake in a company that was part of the Indian promoter group. Over the years, however, weaknesses have crept into the system.
In First American Securities, despite Bharti holding 90 per cent, Axa holds the right to appoint the SPV nominee on the board of Bharti Axa. Disclosures made by the SPV to the ministry of corporate affairs show that between July 5, 2006 and February 26, 2010, Axa paid Rs 406.38 crore to acquire around 4.35 million shares.
Bharti group entities were allotted 47.98 million shares for Rs 47.98 crore, the documents show. Axa, thus, paid a large premium to buy the shares of the SPV, while the Bharti group obtained the shares at a face value of Rs 10.
In response to a detailed questionnaire sent last week, a Bharti Axa spokesperson said the foreign shareholding is aligned with the Insurance Act and that the company had received the requisite regulatory approvals. "The company is supervised by the board, which includes representatives of both partners and independent directors," the company said in an e-mailed response.
"An inescapable conclusion is that the SPV helps the promoters overcome the extent of foreign control implied in the existing FDI regulations," discovered K S Chalapati Rao of the Institute for Studies in Industrial Development and Biswajit Dhar of Research and Information System for Developing Countries in the course of their research.
Bharti Axa is not the only example. The articles of association for Max New York Life Insurance and Tata AIG General Insurance also have specific clauses to provide the foreign partners veto power in key management decisions.
At Max New York Life Insurance, Max India holds 74 per cent and New York Life has the remaining 26 per cent. "On the face of it, Max India has majority control, but when it comes to forming a quorum, at least one director nominated by Max India and New York Life should be present," said Rao.
"To take certain decisions by the JV or its subsidiaries, prior approval of a majority of the board of directors, including approval from at least one director appointed by Max India and one appointed by New York Life, is needed," he added. "These conditions nullify the majority enjoyed by Max and make New York Life an equal partner in decision-making."
The company did not respond to a questionnaire sent by Business Standard.
Tata-AIG General Insurance's articles of association have earmarked an exhaustive list of items that require affirmative vote from the authorised nominee of each of the initial shareholders. In the eventuality of a tie, even the chairman does not have the right to cast a deciding vote. Among other things, the list includes appointment or removal of the managing director, approval or amendment to the business plan and declaration or payment of dividends.
Tata AIG also did not respond to an e-mailed questionnaire.
Another consultant with a leading global firm said foreign partners insisted on the insertion of "protection clauses" to ensure that they were not sidelined once the Indian promoters got the know-how to run insurance companies. Depending on the comfort level between the partners, there were anywhere between 5 and 15 areas where protection is available.
Typically, the areas include capital, which ensures that the Indian partner cannot raise its stake without the explicit consent of the foreign players. Investment and underwriting policies and protection of the balance sheet areas are the other areas where both the partners are "equal shareholders".
"Ten years ago, what was decided between most insurance JV partners was an affirmative vote on certain critical issues. These issues are dealt with by a committee-type of structure, which could be in the form of consent from the nominees of both the partners. In most cases, the chairman is the Indian partner's nominee, so he does not enjoy the casting vote," the researchers said. "There is obviously a need for the government to specify the objectives in placing caps in each sector and also to study how the present caps are working in practice," Rao said.
