CEOs of insurance companies are still to make up their minds whether raising foreign direct investment limits in the sector is a good move or not.

It is like being a child torn between two parents, one living in India and the other overseas. Chief executive officers today are a perplexed lot. When asked to give their views on foreign direct investment in the pension industry, they simply cannot take a stand.

The CEO of one of the larger life insurance companies head-quartered in the West told Business Standard: "I have two shareholders; one would want 100 per cent in the pension sector, the other may not..." He diplomatically declined to take a stand on the hike in FDI.

There are sub-plots within the main story, as the insurance industry considers whether or not the FDI cap in the insurance sector will actually be raised.

The common man's picture of the fight for FDI was seen solely as a political one -- where the Left is acting spoilsport in raising the FDI cap from the current 26 per cent to 49 per cent.

The reality, however, is that the industry is as divided as the political parties. Indian corporate chiefs like Deepak Parekh and Rahul Bajaj are keen to dilute their holding in their respective insurance joint ventures.

At the same time, they want to maintain their majority stakes. Says Bajaj: "I do not support FDI beyond 49 per cent as I want control." Bajaj Auto has two insurance joint ventures in partnership with Allianz.

Parekh shares a similar view, stating that Housing Development Finance Corporation is bound to its foreign partners to sell up to 49 per cent. HDFC has signed MoUs with Standard Life for the life insurance venture, and Chubb for the non-life entity.

India's financial and corporate giants will not let go of more; not now, when life insurance companies are expected to break even in the next couple of years. "I would rather dilute our stake [in SBI Life] to the general public," says A K Purwar, chairman, State Bank of India.

It is the smaller players who are eager for a hike in the FDI cap. The current FDI limit will restrict the growth of private insurance players because a sizeable working capital is required, points out Philip G Scott, group executive director, Aviva Plc. He admits that growth at Aviva could suffer.

"We have contingency plans in place but in a worst-case scenario, business will need to grow much more slowly if FDI is not raised," he adds. Aviva is a 26:74 joint venture with the Dabur group. The two partners will proportionately infuse an additional Rs 77 crore (Rs 770 million) in January 2005 for this year's business growth.

Max India managed to take care of the want of capital for its life insurance venture, Max New York Life. It raised Rs 200 crore (Rs 2 billion) by divesting 29 per cent equity in favour of a private equity investor Warburg Pincus group and associates, through a preferential equity offering.

The fresh infusion of funds will be deployed to meet Max's investment in the life insurance and healthcare businesses, points out the company's chairman Analjit Singh.

Foreign partners are equally keen to increase their share in insurance joint ventures to make current investments worthwhile.

"Raising the FDI cap will give confidence to foreign investors to do business on a scale that is not restrictive," says Sunil Mehta, country head, AIG.

His view is shared by a number of global chiefs who have of late visited India and met the regulator. There is some hesitancy among international investors who have a limited appetite to invest in equity capital, bring in the necessary IT and expertise, when they can have only 26 per cent stake.

"There are many more choices for us [globally] to deploy capital where we can best achieve the interest of shareholders," says Aviva's Scott.

Then there is the joker in the pack, if one looks at the numerous tie-ups that have broken off between Indian companies and global insurance majors.

Had the sector been opened up when P Chidambaram was the finance minister in the late 1990s, there would have been at least eight to nine European insurance entities in joint partnership. Royal had signed up with DCM and SunAlliance had tied up with Cholamandalam. When SunAlliance and Royal merged, the Indian partners were ditched.

Similarly, General Accident had an initial MoU with Bombay Dyeing and Commercial Union with Hindustan Times. Following the merger of General Accident with Commercial Union to form CGU, partnerships with local companies were struck down.

CGU then tied up with Dabur and the entity is called Aviva. Incidentally, Dabur had earlier partnered with another European insurance major, Allstate Life Insurance. As the latter's global plans did not feature India, the non-life insurance venture fell through.

Today, foreign media reports that Axa is looking at acquiring Prudential Plc. Similarly, Standard Life is also believed to be on the radar of some global insurance majors as it plans to go public.

This will see further consolidation in the international insurance arena where capital scarcity continues to be an issue. There could be repercussions for India, especially at a time when the government is looking at raising the FDI cap.

Japan's Mitsui Sumitomo Insurance recently acquired the Asia General Insurance operations of Aviva Plc. The sale encompasses Aviva's general insurance business in Singapore, Malaysia, Thailand, the Philippines, Hong Kong and Taiwan.

Had Aviva's plans for setting up a general insurance company in India -- prior to CGU merging with Norwich -- come about, the Indian entity could well have been on the block; or the Indian partner would have been on the prowl for a new foreign partner.

At the moment, Indian promoters are apprehensive that should FDI be raised, foreign partners will have an upper hand in the 10th year of operation. Their concern follows the Insurance Act dictating the dilution of Indian promoters' stake in favour of the general public.

This means that while Indian promoters would end up holding 26 per cent according to the IRDA Act, their foreign counterpart could have a higher stake of 49 per cent.

"Indian promoters have been absorbing a large portion of the losses over the past three years. So the government will have to ensure that at the time of reducing the shareholding in favour of the public, the residual shareholding pattern ought to mirror the 51:49 ratio, favouring Indian promoters," points out Deepak Satwalekar, managing director HDFC Standard Life Insurance Company.

C S Rao, chairman of Insurance Regulatory and Development Authority, says in response to industry's apprehensions that the clause would necessarily be amended, "else both the shareholders will need to bring down their respective holding to 26 per cent." The IRDA Act had not visualised foreign holding rising from the current 26 per cent to 49 per cent.

At the same time, India Inc hopes to make a killing when it sells its stakes to foreign partners. "Dilution of shareholding will be at a premium. I cannot see Indian promoters diluting at par after having put in the majority of funds in the beginning when the venture was taking off," says Shikha Sharma, managing director, ICICI Prudential Life Insurance Company.

Foreign partners have already indicated their keenness to raise their stakes, even if it is at a premium. Prudential Plc, the foreign joint venture partner of ICICI, has beefed up plans to hike its stake in ICICI Prudential Life Insurance Company.

It has mopped up £1 billion through a rights issue from its investors in the UK, which is aimed to fund expansion plans. The company has the highest paid-up capital base in the industry at Rs 825 crore (Rs 8.25 billion), and is second to Life Insurance Corporation of India.

The industry agrees that divestment of stake will only take place at "the right price". However, what could be the fair price is currently under dispute.

"If divestment has to happen, you want that to happen at a fair value. This value cannot be determined unless you have greater clarity on some of the issues of taxation....else you might end up forcing an Indian promoter to sell his company cheap," says Sharma.

The next moot point is: what will happen to the shareholding pattern on further dilution to the public? Some insurance companies feel divestment to the general public will become irrelevant once the FDI ceiling is raised.

"There is no need to take the company public if the idea is to ensure availability of capital when both partners can easily bring in funds. If foreign equity is raised to 49 per cent, the issue needs to be approached differently and the clause will need to be amended," says Venkatesh Mysore, managing director, MetLife India.

Until a final decision is taken by the Centre on raising the FDI cap in the insurance sector, many of the joint ventures will come under pressure.