Insurance Joint Ventures in India : Who calls the shots

A majority of Insurance Companies who operate in India through JVs with Indian firms exercise significant control in terms of decision making despite having just 26% stake. The agreements signed during the JV incorporation has such terms that it reduces the decision making powers of the majority stake holding Indian promoter.

For instance, we have Bharti AXA which is a JV between Indian Telecom major Bharti & French Financial Services major AXA. The agreement between them has such terms that it allows the foreign minority stakeholder to call the shots despite having just 26% stake.

If any decision is to be approved at Bharti AXA, their articles of association (AOA) says that a majority opinion of the directors alone is not sufficient, if it does not include an “affirmative vote of the Axa director”. Domestic laws allow any shareholder with a 26 per cent stake to veto proposals, though decisions are based on the majority opinion.

Initially, the Insurance Regulatory & Development Authority stressed on foreign investors paring their stakes in local insurance arms if they also held a stake in a company that was part of the Indian promoter group. Over the years, however, weaknesses have crept into the system.

Bharti Axa is not the only example. The articles of association for Max New York Life Insurance also have specific clauses to provide the foreign partners veto power in key management decisions.

In the case of Max New York Life Insurance, if certain decision is to be taken by the JV or its subsidiaries, prior approval of a majority of the board of directors, including approval from at least one director appointed by Max India and one appointed by New York Life, is needed. These conditions nullify the majority enjoyed by Max and make New York Life an equal partner in decision-making.

Foreign partners in these JVs have always insisted on inserting protection clauses to ensure that they are not sidelined once the Indian arm gets the know-how of how to run an Insurance Business.

There are some 5 to 15 areas where protection is available depending upon the comfort level between partners. Majorly, the areas include capital, which ensures that the Indian partner cannot raise its stake without the explicit consent of the foreign players. Investment and underwriting policies and protection of the balance sheet areas are the other areas where both the partners are “equal shareholders”.

Finally, there seems to be a need for the Government to specify the objectives in placing caps in each sector & also to study how the present caps are working in practice.

Consumers should compare insurance quotes and policies for various Indian Insurance Companies online before deciding on their insurance company.