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IRDA FOR RAISING FDI CAP AHEAD OF LISTING
June, 11th 2010

New rules that stipulate a minimum 25 percent public shareholding in listed firms cant be implemented by insurance companies unless the government allows an increase in overseas ownership limits, the industry regulator has said.

The government has been reluctant to push through its own proposal to raise the foreign direct investment (FDI) limit to 49 percent from 26 percent in insurance companies fearing a backlash from trade unions and political parties, who oppose the move.

The FDI limit in life insurance has to be raised first to go with the recent minimum public shareholding norms, Insurance Regulatory and Development Authority (Irda) chairman J. Hari Narayan said. We are examining the situation.

In most insurance joint ventures, the foreign companies hold the maximum 26 percent stake, with the remaining 74 percent being held by the domestic promoter. Under company law, a 26 percent stake gives an entity the power to block any special resolution and foreign insurers will lose board power if their stake goes below the current level.

With foreign partners unwilling to dilute their stakes below 26 percent, since most have entered the business in anticipation of the limit being bumped up, the local partner will be forced to reduce its stake to 49 percent to meet the new norms. That could create its own complications since under Indian company law, a 51 percent stake ensures ownership.

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