India is all set to raise the foreign direct investment (FDI) limit in the insurance sector to 49 percent with prior government approval while it will still be automatic for anything up to 26 percent, as the government seeks to put in place the much-debated reform aimed at easing the capital crunch faced by the industry.
The finance ministry has floated a Cabinet note for inter-ministerial discussions, acting swiftly in line with the announcement in the recent Union Budget, two senior government officials familiar with the development said.
“A Cabinet note has been circulated to elicit views of concerned ministries,” said one of them. Finance Minister Arun Jaitley said in his July 10 budget speech that the government proposed to raise the limit to 49 percent from 26 percent, a long-standing government pledge that hasn’t yet been approved by Parliament.
The freeing up of overseas investment curbs”FDI of up to 49 percent has been proposed in defence for instance”is part of the Narendra Modi government’s bid to boost sentiment on India and make it an attractive destination for foreign money.
As per the fresh proposal floated by the department of financial services, FDI up to 49 percent will be allowed in the sector after the prior nod of the Foreign Investment Promotion Board (FIPB), on condition that control stays in Indian hands.
However, FIPB approval will not be required for FDI up to 26 percent, as per current policy. The cap would be composite, implying that it would include both FDI and portfolio investment. The measure will also pave way for insurance companies to list on the stock exchanges.
The Modi government is keen to see the amendments to the insurance bill being passed in the current session of Parliament itself.
The inability of the previous government to fulfill the promise of raising the limit in insurance meant the industry was stuck in a rut.
Most foreign investors in joint ventures were unable to bring in more funds as Indian partners were unwilling to pump in money that would have been needed to maintain their holding at 74 percent.
There is enormous potential for insurance in a country in which large swathes of the population don’t have coverage. But the industry needs a Substantial amount of money to increase life insurance penetration, which was just 3.17 percent in 2012, while non-life coverage was even worse at 0.78 percent. Insurance penetration is measured as gross premium income as a percentage of GDP.
With the latest move, the government has junked the earlier thinking that there should be differential voting rights to allow additional foreign investment and has opted for a simpler regime.
“There are public sector insurance companies – LIC has done a great job… However, the insurance sector is investment starved… In all countries in the world that have seen a jump in healthcare facilities, health insurance exists on a large scale,” finance minister Jaitley had said in his reply to the discussion on the budget in the Lok Sabha.
The proposal to raise the FDI cap in insurance has been pending since 2008. The previous United Progressive Alliance government had introduced the Insurance Laws (Amendment) Bill to raise the cap to 49 percent. However, the BJP had opposed a higher cap in the sector at the time, making passage of the measure difficult.
The parliamentary standing committee on finance, which was headed by senior BJP leader Yashwant Sinha, had rejected the proposal, sayin g it could expose the financial sector and the economy to global vulnerability.
Incidentally, it was the last NDA government that threw open the sector to private investment in 2000 after the enactment of the Insurance Regulatory and Development Authority Act, 1999.
As of March 31, the insurance sector had as many as 52 life and non-life insurers, including state owned Life Insurance Corporation of India (LIC) and four public-sector general insurers.
Source: Deepshikha Sikarwar, Economic Times