‘Direct Taxes Code is unfair to life insurance’

With the proposal for the Direct Taxes Code (DTC) set to acquire dimensions of reality come April, the insurance industry is waiting with bated breath to assess potential fallout.

SB Mathur, secretary-general, Life Insurance Council, thinks the DTC is not in life insurance’s interests. But, he tells Yogini Joglekar, foreign direct investment (FDI) and initial public offerings (IPOs) of equity shares can help revive the industry and fill financial gaps. And the most-awaited bancassurance guidelines, he opines, need some tweaking , to ensure smooth functioning of the insurance business.

Will the DTC help the insurance industry?
DTC is very unfair to the insurance sector as it proposes a separate window of Rs50,000 apart from Rs1 lakh, which will include payment made towards educational expenses and health insurance, which leaves nothing for the life insurance space.

Under the proposed DTC Bill 2010, deduction for payment towards life insurance cover is allowed only if the premium paid in a year does not exceed 5% of the sum assured. This proposed cap of 5% will deny benefits and lead to inequity, as for same term and sum assured, tax exemption would be available to say a 30-year-old person, but not to a 40-year-old.

It is, therefore, very unfair to people in the middle and higher age-groups, and income level as insurance won’t be lucrative under the tax umbrella anymore. There is a mortality premium which cannot be less than 10% which is already provided in the regulation. So, why this 5% limit which now the DTC suggests? We have made a representation; but, there is no feedback yet

What is your concern about life insurers not showing interest in the recently launched bancassurance draft?
The bancassurance draft typically suggests the insurance company cannot have a pan-India representation. But it will be very awkward and unfair for some branches of an insurer to not provide their products in some pockets of India, especially if they have been servicing those customers for a long time.

For instance, if a company dilutes its shareholding to some percentage, one cannot detach its brand value from it. Hence, we suggest that IRDA (Insurance Regulatory and Development Authority) should allow banks to represent two companies under each category rather than keeping it as a complete open architecture system.

The current draft will lead to a mess and lot of malpractices in this industry. Secondly, whatever commission is permissible should be paid, even if it amounts to 100% instead of 85%. If banks and insurance companies are unhappy with this, they should alter it accordingly as it will help them sharpen their skills too.

Because of the zonal bifurcation, customers will be the most hit as they won’t have the choice of products too. Bancassurance will help in penetration of insurance in India, as more than 70% of Indian banking is through the public sector.

What is the update on the IPO front? Are life insurers showing any interest in raising capital through the public?
They are planning to, but looking at the condition in the capital market, I don’t see much happening at least in the next four months. If the market sentiment improves, then we can definitely expect life insurers to think about raising capital.

Firstly, there are hardly any companies eligible to float an IPO, and in addition, it takes time to take such a decision because they have to take care of their profit margins, especially when the industry is still getting accustomed to the changes in Ulip (unit linked insurance plans) regulations.

Embedded value is a better eligibility criterion than profitability, as it shows the long-term fitness and future value of the company, even if the company may not have started generating book profits.

What is your view on the parliamentary committee not clearing the bill relating to FDI in insurance?
The parliamentary committee has recommended against this bill, but we feel there are strong reasons to opt for it. Firstly, domestic promoters are not able to raise capital. Except for four companies, most of them are not eligible to go to the market as on date.

Secondly, those who are eligible may find it difficult to raise capital under such market conditions, as individuals are risk-averse, and institutions cannot invest because they are already committed. On the other hand, mutual funds have very little scope to invest in banks. Also, there are not many institutional investors coming in.

We have seen FDI and foreign institutional investors (FIIs) in other sectors. In banks, there is a high FDI and FII limit. Asset management companies are also allowed higher FDI, and stock exchanges, which are very critical to the economic activities, are also allowed up to 49% FDI cap. In all these sectors, it has not led to any unfair practices. These segments are even allowed to invest part of their funds abroad, whereas insurance companies aren’t allowed to. Lastly, our history shows that no foreign partner has reduced its commitment in its Indian operations. We are forgetting that FDI will bring in long-term capital which India requires  ight now to remain competent in terms of infrastructure, steel, textile and other upcoming projects and technological upgradation too.

This will immediately bring in at least Rs20,000 crore of foreign capital. Five years down the line, this increased FDI can bring in close to Rs25,000 crore into the system. At a time when the Indian rupee is showing a lot of volatility, influx of capital for a long-term basis (foreign exchange) will arrest the volatility of the rupee in the foreign exchange market.

What is your take on the recently cleared bill which provides for insurance and pension to Indian workers overseas?
It is a good move, although the pension provided to Indians working abroad will not be sufficient for them. Therefore, we look forward to Indian entities that will operate overseas in future to provide incremental pension, keeping in view the expected pension requirements befitting their financial status after they retire.