In a first major reforms initiative by the Modi Government, the Cabinet on Wednesday gave a go-ahead to FDI cap hike in insurance to 49 per cent with a rider that management control will remain in the hands of Indian promoters.
The move kicks off expectations of relaxation of FDI norms in railways and defence as well in the coming days.
The Cabinet’s approval to hike the FDI limit from the current 26 per cent, a proposal which has been pending since 2008, is expected to attract long term capital, besides improving the overall investment climate. The decision is expected to pave way for inflow of as much as Rs 25,000 crore foreign funds in the sector.
“The CCEA has approved raising of FDI cap in insurance sector to 49 per cent from 26 per cent,” sources said, adding that all investment proposals beyond 26 per cent will have to be approved by the FIPB and Indian promoters will continue to have the control of the management.
With the Cabinet approving the amendments to the long pending Insurance laws (Amendment) Bill, it will now be taken up by Parliament.
According to KPMG, the higher cap could fetch investments up to Rs 25,000 crore. “Once there is proper clarity on the interpretation of control by Indian promoter, the additional foreign capital expected across life, health and general insurance companies is between Rs 20,000 to Rs 25,000 crores,” KPMG (India) Partner Shashwat Sharma said.
After the Bill is passed by Parliament the same norms for foreign investment will apply to the pension sector as well.
“We welcome the Cabinet’s approval to increase FDI limit in insurance from 26 to 49 per cent with full Indian management and control, as it will help in attracting the much needed long term capital for the sector which can have multiplier effect on the state of economy, especially in meeting the huge infrastructure financing requirements,” commented CII Director General Chandrajit Banerjee on the FDI approval.
Chairman of Ficci’s Insurance Committee and MD & CEO of HDFC life Insurance Amitabh Chaudhry said the proposed FDI cap increase will hopefully drive capital infusion in the insurance sector and revive growth.
“Given that the (insurance) industry has witnessed muted growth in recent times, this move will further enable the industry to serve millions of under-insured Indians, improve life and health insurance coverage and provide long term savings vehicles,” he added.
With the Cabinet approving the amendments to the long pending Insurance laws (Amendment) Bill, it will now be taken up by Parliament.
Assocham President Rana Kapoor said liberalisation in the insurance sector will send an important signal to the global investors about the earnestness of the Narendra Modi Government to go ahead with the financial sector reforms.
“FDI in insurance sector will also strengthen the capital flows in the coming time... It would go a long way to rebuild investment sentiments in the country,” PHD Chamber of Commerce & Industry President Sharad Jaipuria said.
There are about two dozen private sector insurance firms both in life and non-life segment. Industry chamber Ficci said foreign players will enterinsurance as well as the pension sector at this opportune time when the country is in need of foreign investments.
“This move should bring in the much required long-term capital for the sector. It will also bring in domain capital which is of critical importance in this phase of growth of life insurance industry,” Max life Insurance CEO & MD Rajesh Sud said.
In his Budget 2014-15 speech, Finance Minister Arun Jaitley had said that the insurance sector is investment starved and there is a need to increase the composite cap in the sector to 49 per cent, with full Indian management and control, through the FIPB route.
The move would help insurance firms to get much needed capital from overseas partners.
The proposal to raise FDI cap has been pending since 2008 when the previous UPA Government introduced the Insurance laws (Amendment) Bill to hike foreign holding in insurance joint ventures to 49 per cent from the existing 26 per cent.
However, the Bill could not be taken up in the Rajya Sabha because of opposition from several political parties, including the BJP. The insurance sector was opened up for private sector in 2000 after the enactment of the Insurance Regulatory and Development Authority Act, 1999 (IRDA Act, 1999).
This Act permitted foreign shareholding in insurance companies to the extent of 26 per cent with an aim to provide better insurance coverage and to augment the flow of long term resources for financing infrastructure.
The industry has been demanding for long that the FDI limit be raised so as to attract adequate funds for the expansion of the sector.