The main concern among industry and market experts is that the governance in these companies needs to be strengthened and the focus on social insurance has to come down.
Illustration: Uttam Ghosh/Rediff.com.
The Cabinet Committee on Economic Affairs, headed by Prime Minister Narendra Modi, approved the market listing of all five government-owned general insurance companies, namely New India Assurance, United India Insurance, Oriental Insurance, National Insurance and General Insurance Corporation of India.
The initial public offer of equity would be through either the issue of new shares or offloading of existing ones through the offer-for-sale route, Finance Minister Arun Jaitley told the media after the Cabinet and CCEA meetings.
The government has 100 per cent ownership in these companies.
New Cabinet approval will not be needed before hitting the bourses but the proposals would be cleared by Jaitley and Transport Minister Nitin Gadkari.
Such an arrangement, known as alternative mechanism for disinvestment, was also cleared by the CCEA.
“Under the listing requirements, one of the conditions is that the government holding has to come down from 100 per cent to 75 per cent,” noted Jaitley.
Asked if any could be listed in the current financial year before March 31, he said all the procedural formalities were over.
“Now, the companies will have to comply with the listing requirements of stock exchanges and the Securities and Exchange Board of India (the markets regulator),” he said.
Rules of the Insurance Regulatory and Development Authority of India would also be followed.
“Whatever are the regulations, they have to comply,” said Jaitley, when asked if the companies would initially divest 10 per cent stake, as in the regulatory requirement.
“(This) listing will help the market in discovering value for the general insurance business in India since there are no listed players currently. It is also expected to pave the way for listing of private players in the next couple of years,” said Shashwat Sharma, head of insurance at consultancy KPMG.
According to industry experts, the two deals that have occurred in the general insurance space are HDFC Ergo’s purchase of L&T General Insurance and Fairfax’s 9 per cent purchase in ICICI Lombard.
“Both deals took place at the extreme ends of the valuation. Since L&T General’s business wasn’t doing so well, the deal would have been at the lower end of the valuation spectrum whereas ICICI Lombard’s deal would have happened at the top end,” said Ashvin Parekh of Ashvin Parekh Advisory Services.
In terms of multiples to book value, the parameter for valuing insurance companies, Parekh expects the four GICs to get a valuation of 1.8 to 2.2 multiple to book value.
Market sources said that the Fairfax investment in ICICI Lombard would have happened at close to 5-6 times book value.
While the listing of the four general insurers is a welcome step, the main concern among industry and market experts is that the governance in these companies needs to be strengthened and the focus on social insurance has to come down.
“Both these factors make the four general insurance firms not-too-attractive for investors. Also, they are not very profitable companies. We expect the four companies (excluding GIC Re) to have a combined value of around Rs 60,000-Rs 75,000 crore,” said an industry player.
These valuations imply that the government can raise around Rs 15,000-18,000 crore from the stake sale.
Market participants are more bullish about GIC Re because it is a performing organisation and after Tuesday’s circular from Irdai which gave it the right of first refusal, the country’s only reinsurance company is expected to have an advantage over other players in the same segment.
In his Budget Speech for 2016-17, Jaitley had said public shareholding in the state general insurance companies was a means for ensuring higher levels of transparency and accountability, and that these would be listed.
As for the AMD, the CCEA decided that once the Cabinet approved divestment in a public sector undertaking (PSU), a group of Jaitley, Gadkari and the administrative minister concerned would take over decision-making on a range of issues -- date of stake sale, price band and tranches. In the insurers’ case, Jaitley is himself the additional minister concerned.
‘The alternative mechanism would decide on the quantum of disinvestment in a particular central PSU on a case-by-case basis, subject to government retaining 51 per cent equity and management control,’ went the official statement.
This is in addition to the present functions performed by the alternative mechanism as was approved by the CCEA in August 2014, it added.
The budgeted estimate from PSU divestment for 2016-17 is Rs 56,500 crore, of which Rs 36,000 crore was expected from minority stake sales of five to 15 per cent in listed ones and the rest from ‘strategic sales’ of these units.
