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CASE GAME: START-UP PANGS The Case Of The Insurance JV Is the tie-up between the state-owned Bharat Bank and transnational Schwitz Insurance destined to be a non-starter? G.N. Bajpai of Life Insurance Corporation, K.C. Mishra of the National Insurance Academy, and Shikha Sharma of ICICI Prudential discuss. By R. Chandrasekhar
Bharat was the second-largest bank in India and Schwitz, the largest general insurer in Germany. Sen and Riggs had signed an MOU in mid-1997, when the first signs of the Indian insurance market being opened to private players were evident. An eight-member team, drawn from both organisations, had been quickly set up to work out the details in a quiet office in Bharat's headquarters in Mumbai. The business plan was since ready. The product portfolio had been finalised. The distribution had been firmed up. And recruitment of personnel was about to begin. All that remained to be done was to translate the MOU into a formal joint venture (JV) before applying to the Insurance Regulatory & Development Authority (IRDA)-which had already opened its counter-for a licence to start business in India. Preliminaries over, both settled down to a long drive to the city. ''The groundwork we have done so far gives me enough confidence in the future of our relationship,'' Riggs said, ''and I am particularly impressed with some of the products that are innovative in the Indian context. But there are some major concerns that we should address.'' ''Indeed,'' agreed Sen, ''and now is the time to deal with them.'' Both were keen to seize the new-found opportunity in Indian insurance. Both were also aware that some of the issues could become so contentious as to pre-empt the formation of a JV. Later in the day, when the start-up team assembled at Bharat's office, Riggs opened the discussion on an optimistic note. ''Two years ago, we were drawn together by the sheer size of the Indian market. We both had unique strengths-Schwitz, its experience worldwide of the insurance business; and Bharat, its knowledge of the local market. Those are still valid. But,'' he said, pausing for effect, ''when we signed the MOU, the IRDA had not yet formulated its regulations. The paradigm has somewhat changed now.'' ''One of the main concerns of Schwitz is the seven year lock-in period for the JV,'' continued Riggs. ''The IRDA makes no provision for an exit option for either of the partners during this period. Of course, we should proceed on the belief that the JV will last. But business norms demand that we factor in all possibilities in our calculations.'' ''That is a risk inherent in any JV and has nothing to do with the time-factor,'' said Mick Robins, an actuary from Schwitz who was involved in start-ups in several countries. ''True,'' agreed Riggs. ''But what are the options if things don't work out? I think we should examine the possibility of bringing in a third partner.'' Sen was surprised. This was a new angle. ''If there are synergies, perhaps yes,'' he said. ''But that is hardly the solution. In fact, it may only complicate matters. Particularly over turf.'' ''That leads me to the second issue,'' said Riggs. ''Management control. We would like to have Schwitz nominees in the two critical positions-the CEO and the chief actuary.'' Sen had seen this coming. ''Personally, I believe that ownership and management are two separate issues,'' he said. ''But my board will have a different view. When Bharat Bank brings in 74 per cent of the equity, it is only fair to expect that top-level positions are held by us.'' ''Bharat can nominate a deputy CEO who reports to the CEO and succeeds him later on,'' offered Riggs. ''I need to get clearance for that from my board,'' said Sen. ''It will require some convincing. Because the board feels Bharat could go solo. After all, distribution is the key to success in insurance. And given our branch network and also the fact that we bring in 74 per cent of the capital, there is no reason why we can't do it alone. Bharat can access technology and products from Schwitz or somebody else for a fee.'' ''We value the association with Bharat,'' said Riggs. ''That is why we are not insisting on using our brandname in India, as we do in every country we operate.'' ''But there is one issue that is bothering us at Schwitz,'' said Riggs. ''You are one of the largest nationalised banks in India. I would be wary of the operations of the JV-and perhaps even of Schwitz Gmbh-being scrutinised by an official agency like the Central Vigilance Commission or the Central Bureau of Investigation based on some flippant reason. Tell me, how free are we to do business the way we both deem fit? Should we wait until the disinvestment comes through and you become a private bank in the true sense?'' Are the apprehensions of Riggs justified? How can both the partners iron out the differences and move towards setting up a JV? What is the additional groundwork required to ensure the success of the proposed JV and enhance the mutual benefits? |
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The flight
from Frankfurt had just landed at Mumbai's Sahar airport. Vikram Sen,
Executive Director, Bharat Bank, spotted Helmut Riggs, CEO, Schwitz
Insurance Gmbh, winding his way through the arrival lounge. As always, he
was impressed by the German's swagger. And swarthiness. Sen was also
somewhat overawed by the thought that the discussions with Riggs, later in
the day, were crucial to the success of an initiative both had spearheaded
during the last two years.
