The government and financial sector regulators have prevailed on Insurance Australia Group (IAG) to route its investment in a general insurance venture with State Bank of India through Singapore, instead of the original proposal to bring the money through a Mauritian subsidiary.
Sources involved with the finalisation of the joint venture confirmed the development and said the investment through Singapore would still make IAG eligible for tax benefits, under India's Comprehensive Economic Cooperation Agreement (CECA) with the city-state.
IAG's investment in the joint venture, in which it would hold 26 per cent, is estimated at Rs 540 crore, including an entry premium.
According to sources familiar with the development, the regulators wanted transparency in the transaction, especially because it involved the country's largest bank, which is also a public sector player.
Contacted, an IAG spokesperson said he would respond to the questions as soon as possible.
Although the tax benefits under CECA are the same as those offered by the Double Taxation Avoidance Agreement with Mauritius, the Indian government had ensured that companies do not use Singapore merely to avail of fiscal incentives. As a result, a clause has been inserted in CECA allowing only companies with a presence for a specified number of years and having invested a certain sum of money to be eligible for tax benefits.
The sources said following SBI's assurance, the Insurance Regulatory and Development Authority (Irda) has given the general insurance venture first-stage approval. SBI Chairman Om Prakash Bhatt recently said the company was expected to start operations by the end of the year.
The joint venture can take the advantage of more than 15,000 SBI branches across the country to distribute its non-life products. The large branch network has helped SBI Life Insurance, the group's life insurance venture, become the first private sector player to break even in 2006-07.
India currently has 21 general insurers. Among new general insurance players which entered the sector are Raheja-QBE, which started operations in April 2009. The joint ventures of Religare-Swiss Re and Max Bupa are also expected to enter the health insurance market in 2009-10.