News Excerpt:

Given political turmoil in different countries across the globe, Indian industries wanting to spread their wings beyond Indian shores have been seeking political risk insurance (PRI).

Recent losses faced by Indian companies amid political turmoil:

• In 2013, Indian infrastructure company GMR left Maldives when relations between India and Maldives turned sour. After protracted arbitration, GMR was awarded $270 million in 2016 against claimed losses of $800 million.
• Jindal Steel had to walk out of a multi-billion-dollar project following a scandal over the encashment of bank guarantees by the Bolivian government. The Indian company was awarded $22.5 million against claimed losses of over $100 million.

What is Political risk insurance?

• Political risk insurance is a type of insurance that companies and businesses can take out to safeguard themselves against political volatility.
• Political risk insurance can cover many possibilities, such as expropriation (e.g., government confiscation of property), political violence (e.g., acts of civil unrest or insurrection), the inability to convert local currency and repatriate it, sovereign debt default, and even acts of terrorism and war.

Need for Political Risk Insurance in India:

• To transform India into a global economic power, Indian businesses must expand their footprint beyond domestic markets. 
• Outbound Foreign Direct Investment (FDI) will be instrumental in accomplishing this business expansion. India’s outward FDI imperative may be understood from two perspectives:
• One, India and Indian businesses must have a strategy to identify and capture markets abroad through forward integration in largely untapped and underserved regions such as Africa and South America. 
• Many of India’s small technology-enabled companies could move quickly into global markets.
• For these ‘born global’ startups and micro, small, and medium enterprises (MSMEs), outward FDI may be a critical means of business expansion.
• Two, in a globalized world, raw material sourcing can play a significant role in businesses gaining a competitive advantage. 
• Therefore, unsurprisingly, some Indian companies have invested in facilities across the globe in pursuit of such an advantage while expanding operations. 
• The future expansion strategies of Indian businesses must stay cognizant of the emergence of some developing nations as major suppliers in the coming years.
• The drive for decarbonization across industries has been driving demand for critical minerals that go into clean-tech solutions from such countries. This presents an opportunity for backward integration by Indian businesses through outward FDI.
• The outward FDI path, however, is not free of hurdles. Some relatively untapped markets are particularly prone to high political risk, unfortunately. 
• Given this backdrop, PRI is a tool for businesses to mitigate and manage risks arising from the adverse actions or inactions of governments. 
• As a risk-mitigation tool, PRI helps provide a more stable environment for investments in developing countries. It also eases the access of companies to finance on good terms.

PRI in India:

• In India, some private insurers and ECGC Ltd, a state-owned insurer, provide PRI. 
• However, there is a major challenge that contributes to an observed under-utilization of PRI by Indian businesses as an effective tool for expansion: the low availability of US dollar-denominated PRI policies.

• The frequent renewal of short-term rupee-denominated policies issued by Indian insurers is cumbersome and perhaps motivates businesses to opt for risk cover from international insurers that operate overseas.
• To facilitate the growth of Indian businesses outside India, India must overcome this problem associated with political risk insurance.

Rupee-denominated PRI policies:

• Rupee-denominated PRI policies are not adequately useful for businesses as the Indian rupee has been depreciating in value against the US dollar for years. 
• The assured sum may not be sufficient to cover losses over extended periods.

Global practice:

• Globally, most national PRI providers offer risk coverage in foreign-denominated currencies. 
• This includes the UK, where insurers offer 60-plus local currency options for PRI. 
• For Turkey, its Exim Bank offers coverage principally in dollars and euros, although it also offers many other options, like the Japanese yen and the British pound. 
• In Japan, specific policy conditions are laid out for insurers to provide foreign currency-denominated payouts; these include dates for applicable foreign exchange conversion rates for such payments.