Financial Daily from THE HINDU group of publications
Tuesday, Jun 18, 2002
Money & Banking
GIC may transfer stake in 4 PSU insurers at par
BANGALORE, June 17
GENERAL Insurance Corporation (GIC), the holding company of the four public sector insurance companies, has proposed transfer of its equity stake in them to the Government at book value.
Initial expectations are that the entire transfer would be done at par value. This is because all the equity buybacks by the public sector banks from the Government have been at par.
However, GIC was not comfortable about this kind of pricing, sources said. This was because all the four general insurance companies, New India Assurance Company Ltd, United India Insurance Company Ltd, National Insurance Company Ltd and Oriental Insurance Company Ltd, had been doing well despite the large underwriting losses, especially in motor insurance that they had absorbed in the past.
Besides the public sector insurance companies, unlike the banking sector, have availed themselves of negligible support from budgetary resources either directly or indirectly after nationalisation. Instead, all of them have consistently been paying dividends and corporate taxes. This is over and above the investments that the companies have parked in Government securities and special deposits of the RBI.
The transfer at par value would have meant an inflow of just Rs 400 crore into GIC, the sources said. But with the combined capital base of Rs 10,500 crore including reserves, the realisation for GIC is likely to be in excess of Rs 260 per share. Each of the insurance companies has a paid-up equity base of Rs 100 crore.
Among the companies with the strongest capital base is New India Assurance Company Ltd. New India has capital plus reserves position of close to Rs 4,200 crore, followed by United India Insurance Company Ltd.
GIC is currently the holding company for the four companies.
These companies till recently functioned as subsidiaries of GIC. However, they began functioning as separate entities after GIC was converted into the national reinsurer by the Insurance Regulatory and Development Authority of India.
By convention worldwide, reinsurers are not expected to have equity holdings in primary insurance companies.
The sources said that the transfer would be effected during the current financial year itself and allow for strengthening of GIC's capital base. The transfer, the sources said, had been facilitated in view of the amendments to the statutes governing the general insurance sector.
GIC would need to be capitalised further for meeting the reinsurance requirements in the country for projects, property and marine risks.
The sources said the transfer of equity would now allow the dividends from these companies to accrue directly to the Government. One of the important benefits of this move is that each of these companies would be in a position to autonomously decide their cost structures.
This would also help them work out strategies for remaining profitable in an intensely competitive environment, without compromising on the social sector obligations.
Indications are that the move to transfer the equity to the Government could also be a prelude to divestments from the sector.
But the sources said: "Once the transfer is effected, it is the Government's discretion to divest partially or fully from the companies." Only the national reinsurer is expected to remain fully Government-owned.
This is because, unlike the banking sector, insurance sector is likely to realise high value in the event of divestments. This was in view of the large asset base of the insurance sector.
Besides, with the de-tariffing of some of the insurance products, premium income was expected to be better both horizontally and vertically, they added.
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