Edinburgh-based Standard Life is one of the world's leading savings and investment companies, with six million customers across 50 countries. It is present in India through its investments in HDFC Life and HDFC Asset Management. Gerry Grimstone, Chairman, Standard Life, on a recent visit to India, spoke to Sarbajeet K. Sen on a host of issues concerning the insurance sector.Q. Standard Life has been associated with HDFC since the Indian insurance sector was opened up more than 10 years ago. How do you see the growth of this sector, especially the private companies, given Life Insurance Corporation is continuing its stranglehold?
A. The industry started very strongly. As you know, we came into the market just over 10 years ago with our friends HDFC with whom we created a very fine business. At one point, LIC's market share dropped down to 50 per cent. But the various regulatory changes over the last two years have greatly benefitted LIC and its share is back to around 70 per cent which is really quite extraordinary.
Q. The trend should have been the other way round…
A. Yes, it should have been the other way round, because nobody minds competition. Everybody likes competition. But it is important that competition is on a level playing field. LIC is a very fine company. I just think that the playing field should be levelled between all the insurance companies.
Q. Where do you think the problem lies? Is it the regulatory issue or legal ones?
A. I think it is the various regulatory changes, particularly the regulator's pushback on the unit-linked insurance policies (ULIPs) that has helped LIC because the private sector companies were strong in the ULIP market. I very much applaud the work the regulator has done to improve things for customers. Anybody who has been in business for a long time the way we have knows customers are the most important thing. So customer safeguards are a good thing. But I think it is always important for an industry like insurance to keep some balance. In fact, it is extraordinary that the total insurance premiums in India fell last year, and it is mainly because of the general regulatory climate. I think this might be the only major country in the world where premiums have gone down. And I don't think that is good for India because insurance is so important for society and it is so important for investment in the economy.
I can understand the difference between 49% and 51%, but not between 26% and 49% in FDI cap
I also feel that progressively the restrictions on insurance companies' investment should be removed. Insurance companies are very used to making safe investments. These can be of great benefit to the economy since it will help garner people's savings through the intermediation of insurance companies.Q. Would you say it is a case of overregulation in India compared to other major markets?
I don't think it is over-regulated. But I think an awful lot was done very quickly. It is very important now that the industry settles down again. If we are looking forward to having the initial public offerings (IPOs) in the industry at some point in the future, we now need a steady regulatory regime.Q. Since you spoke of insurance IPOs, what are HDFC Life's plans for hitting the capital market?
A. For there to be successful IPOs of insurance companies in India, a number of things have to come together. We have to have appropriate market conditions, the companies have to be ready, the regulatory regime has to be settled and consistent, because investors would want to know what companies they are buying into and what the regulations would be. And most importantly, the limit on foreign investment must be raised. The last point is very important because at this moment any IPO of an insurance company in India would have to be purely domestic (because foreign partners already hold 26 per cent in most companies). I am a huge supporter of the cap being raised.Q. Are you happy with the proposal to raise the foreign direct investment (FDI) limit to 49 per cent or do you think it should have been more?
A. Well, I am very happy if it is raised to 49 per cent. I think it is a matter of public policy. The Indian government and Parliament wish to keep insurance companies in majority control of Indians. I think it is perfectly fine as a policy decision. I can understand the difference between 49 per cent and 50 per cent or 51 per cent, but not between 26 per cent and 49 per cent.
Q. Are you saying this because 49 per cent does not give management control?
A. Of course, 49 per cent does not give management control. However, each company will act differently. More importantly, you should not see this through the eyes of FDI. Equally important is foreign institutional investors (FIIs). We should look at it not as FDI but as appropriate foreign investment in Indian insurance companies. Indian insurance companies should stay in Indian control. It should be a matter between partners what the level of investment is, and investment should encompass both FDI and FIIs. Without FIIs, we will not have successful IPOs of insurance companies. If you think about the size of the sector, over the next five years we may have half a dozen to 10 insurance companies coming to the market. This will be a very major new sector for the Indian stock market. We are talking about tens of billions of dollars in IPOs and foreign investment will help make that successful.
Q. Do you think there will be investor interest in insurance IPOs to raise such large amounts, given that the business environment has not been very good?
A. The good companies have done well. And one of the best decisions we made was forming an alliance with HDFC, with my very good friend Deepak Parekh (Chairman, HDFC). It has been a very good partner for us. There are other very good insurance companies as well. In the present tough market conditions, the good companies have gained market share and are still performing strongly.
Q. Would you at any point seek management control of HDFC Life, or would your stake be pure investment?
A. We manage the company jointly with HDFC. It feels like a joint company. Our senior management attends the board meetings. We are close to the management of HDFC. We don't want control of it. We are very happy that HDFC is controlling it, but we run it together as a partnership and that is the best kind of joint venture where each partner knows the strengths of the other. I treat HDFC's Parekh and his colleagues with huge respect. I think they are very fine executives and we are very fine with what they do. So there is no conspiracy (and it is wrong) to say foreign companies wish to take over Indian insurance companies. This limit (on FDI) is purely about financing and what is the optimum capital structure for Indian insurance companies. I do hope Parliament, if it gets to vote on the bill in this session, sees it in this light.Q. That, of course, is a very big 'if'.
A. It is a very big 'if', but I am hopeful. India has to make a choice. If it wants continued economic growth, if it wants continued investments, insurance companies are an important part.
Q. To mobilise long-term savings…
A. Yes, for long-term savings there is no better route than insurance companies. So, there is a decision before Parliament. I think this is caught up with politics, with symbolism, and that people need to take a step backwards and look at what is in the best interest of India.Q. Standard Life being in many areas other than insurance, do you see a larger engagement in India, especially with the pension sector opening up?
A. We are basically a savings and investment company. We don't see ourselves as a life insurance company. We have two businesses with HDFC: HDFC Life and HDFC Asset Management. We are, of course, both interested in developing the savings market and the pensions market.Q. Coming back to the IPO, do you have any timeframe in mind for HDFC Life?
A. As I told you there are some factors that need to come into alignment. Until those factors come into alignment you cannot set a time frame.Q. Are you happy with the disclosure standards in India?
A. I think they are very clear. Companies like us and HDFC always act in accordance with the top global standards. I mean standards are never an issue.Q. With so many insurance companies vying for business, do you think there is a case for consolidation in the industry?
A. I can see that will happen at some point in the future, because some of the companies are not doing as well. However, market growth has to resume. Coming back to my earlier point, the extraordinary thing is that the market has declined. That has to be reversed.
Q. You spoke of the new ULIP guidelines slowing down the market. What are your concerns on that?
A. I think they are fine. We need to settle down with a period of stability. And also, of course, the other important thing is what's going to happen with the tax code (Direct Taxes Code), because in every country if you want to encourage long-term savings and pensions, DTC is important. I feel there are lots of moving parts here and it is important that those moving parts settle down at some point.Q. All those moving parts are big factors in your future decisions, including timing of the IPO…
A. Oh yes, they will be big factors in the decisions which will eventually lead us to decide on the IPO.