The Union Cabinet’s recent decision to halt the merger of three public sector general insurers ~ National Insurance, Oriental Insurance and United India Insurance ~ has baffled many economic observers not just because it is a U-turn from the stand adopted by this government earlier. The merger move was announced with much fanfare in 2018 and all steps necessary to make this initiative successful were taken with a great deal of enthusiasm.

Shelving the merger process now means waste of huge public money and time. The government had appointed Ernst & Young as a consultant to offer recommendations on the various aspects of the merger. The boards of directors of the three public sector companies passed resolutions for the merger to take place smoothly. Now, the government has said that the merger process has been halted in view of the current economic scenario and, instead, the focus shall be on the profitable growth of the companies.

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The Cabinet headed by the Prime Minister has approved a Rs 12,450 crore capital infusion, which includes Rs 2,500 crore given in FY20 to the three insurers. Of the balance Rs 9,950 crore, Rs 3,475 crore is to be infused immediately and the rest later. The Cabinet also cleared raising the authorised share capital of National Insurance Company to Rs 7,500 crore and of United India and Oriental Insurance to Rs 5,000 crore each to give effect to the capital infusion.

It is said that the recapitalisation of the PSUs will make these government-owned insurance companies more stable. However, recapitalisation of companies could quite easily have gone together with the merger process. There is no conflict between the two. If the present situation warranted the decision to halt this merger, how could the merger of public sector banks go through? It may be noted that the merger of banks was opposed by their unions, but their protests were brushed aside.

Paradoxically, unions of the public sector insurance companies favour their merger, but the government is now opposed to this. Besides, recapitalisation was done in the case of banks as well, but that did not stall their mergers. In short, the reasons offered by the government do not appear to add up. Analysts suspect that the government is infusing capital into the public sector insurers to make them stronger, to beef up their financials and make them ideal for disinvestment.

Hence the reversal is seen as a prelude to disinvestment. This reasoning suggests that the government wants to divest its stakes after capital infusion which will boost the balance sheets of the three companies and make them more lucrative, and they bring some badly needed funds to the government coffers. Certainly, there is no other plausible reason for the U-turn. At the same time, it is also feared that unhealthy under-cutting of premium rates would continue between the insurers, defeating the very rationale of capital infusion.