Who says the Indian economy is running towards a down turn? The last week saw some positive trends too amidst the political chaos. The most significant happening in the Indian Insurance market, according to my opinion is the steps taken by Max India. Defying the popular trend of Indian companies diluting their economic interests in joint ventures, Max India has probably become the first domestic company to do the reverse. The company has raised its economic interest in its life insurance joint venture company, Max New York Life (MNYL), from 50% to a massive 74%. This increase signifies that Max India’s share in the valuation of MNYL has gone up by 24%. A recent research report by an Indian broking house has pegged the value of MNYL at over Rs. 10,000 crore based on 2009-10 premium estimates. MNYL accounts for about 80% of Max India’s consolidated revenues.

By increasing its economic interest to 74%, Max India has also ensured that this joint venture does not become a subject of financial controversy in the future. The economic interest issue is always a thorny issue for both the investors and the government and the economy. In sectors like insurance , there are FDI sectoral caps. So, it has been a common practice for the joint venture partners to agree to a pre-determined price at which the foreign partner will increase its stake as and when the sectoral cap is raised by the Government.

This pre-determined price is almost always less than the assessed market value at the date on which the share transfer of two companies actually takes place. In such instances, the foreign partner advances interest-free funds to the domestic partner as part of its equity contribution in the joint insurance venture.