Select Committee approves 49% FDI, report tabled in Rajya Sabha
The Union Cabinet on Wednesday approved the amendments to the Insurance laws (Amendment) Bill, 2008, hours after a Select Committee headed by BJP MP Chandan Mitra tabled its report in the Rajya Sabha.
The Select Committee has given the go-ahead to the Government to increase the composite foreign equity investment cap from the 26 per cent at present to 49 per cent for the benefit of the Indian insurance sector. However, this cap should be inclusive of all forms of Foreign Direct Investment (FDI) and foreign portfolio investments.
After the Cabinet, headed by Prime Minister Narendra Modi, approved incorporation of amendments suggested by the Parliamentary select panel, the Rajya Sabha is likely to take up the Bill for consideration and passage early next week.
The panel expressed that incremental equity should ideally be used for expansion of capital base to strengthen the insurance sector. Besides, it also suggested measures to protect policy holders, having penalty for insurance companies commensurate with their offence, having a Securities Appellate Tribunal.
The panel report, however, contains dissent notes from four members, P Rajeev (CPI-M), Derek O’Brien (TMC), Ram Gopal Yadav (SP) and KC Tyagi (JD-U).
As per estimates by Insurance Regulatory and Development Authority (IRDA) the additional capital requirement of the insurance sector would be `55,000 crores (`44,500-crore for the life sector and `10,500-crore for non-life sector) over the next five years, which the domestic industry may not be able to cater. As of now, the 26 per cent cap has limited the capital inflow to `25,000-crore in the life sector. Out of this, `6,000-crore is foreign capital. In fact, the total FDI in insurance sector as of now is hardly one per cent of the total FDI coming to India and at present a very small percentage of the population is covered by life insurance.
“This will bring in much needed capital in the insurance sector. The competition will naturally help in improvement of services to policy holders and increase in products,” said Chandan Mitra.
The committee deliberated at length on safeguards with regard to Indian ownership and control and felt that there was hardly any difference between FDI limits at 26 per cent and 49 per cent on this issue. It said the term ‘control’ must be defined in the Act itself and should include the right to appoint a majority of directors or to control management or policy decisions including by virtue of their shareholding/management rights/ shareholders’ agreements or voting agreements.
On guidelines to prohibit investment of funds outside India and having broad guidelines for investment by insurers, the committee decided to retain the provisions as proposed in the law by saying IRDA should be free to formulate adequate rules and regulations. “IRDA must facilitate the entry of multinational insurance brokers so that they can provide an added impetus to the Indian insurance and reinsurance sector,” the report said.
Keeping in view the scale of re-insurance business worldwide and the low level of its development in the country, combined with the huge potential, the committee has recommended doing away with any ambiguity in the proposed Bill on the word `re-insurance.’ The committee has recommended modifying the definition of re-insurance to mean that “insurance of part of one’s insurer’s risk by another insurer who accepts the risk for a mutually accepted premium.” The committee also accepted IRDA’s suggestion to modify Section 3(3) of Act 1938 to allow a foreign company engaged in re-insurance business through a branch established in India.
The committee recommended that the provision of cancellation of license should be exercised by the authority with abundant caution to avoid unnecessary hardship and penalization of a good company and its policy holders, especially when shortcomings may be due to circumstances beyond its control.
The Select Committee has agreed not to bring down the paid-up equity capital in the health insurance sector as compared to the life and general insurance sector, as it would lead to non-serious players entering the field. The panel suggested that the capital requirements for health insurers may be retained at the Rs 100-crore level to ensure health insurers have adequate capacity for providing critical services to citizens, while pitching for giving top priority to this segment. The committee felt IRDA and Medical Council of India should formulate regulations to ensure that malpractices in health insurance sector such as unnecessary investigations, procedures, hospitalization can be avoided.
However, based on the requests of representatives of insurance cooperatives to strengthen the micro-insurance sector by reducing the capital requirement to help them serve the vulnerable section of society, the committee agreed to lower this cap for them. The representatives of insurance cooperatives felt the regulatory barrier of Rs 100 crores as paid up capital requirement for entry into the life insurance sector was a huge disincentive.
The committee accepted their plea and recommended reduction in the paid up capital requirement for co-operatives to help them access the market segment that has not been assessed by the mainstream, large insurance companies. The committee felt that the low operating costs with which the cooperatives function will enable them to offer affordable products for the underprivileged and complement the social insurance schemes.
During the hearings of the committee, the industry chambers and private sector insurance companies had insisted on freedom in paying their agents/intermediaries, which may not necessarily be in proportion to the business generated by the company. The proposed Bill limits expenditure on commission. The Select Committee recommended that adequate protective mechanism be instituted by IRDA to ensure agents get their commission and the commission structure be determined by IRDA on market conditions. It also recommended the Government to review new Section 40D in consultation with IRDA so that the insurers are not prohibited from earning re-insurance commission and to ensure there are no roadblocks in the growth of the reinsurance industry.
The committee advised IRDA to examine the concept of proposed Multiple Corporate Agency and frame guidelines to allow an agency to operate for more than two insurance companies (both life and non-life). As per existing norms one corporate agency can sell products for and on behalf of only one life and one general insurance company. There was a suggestion to allow MCAs to operate at least ten insurance companies simultaneously (both life and general) since they incur huge overhead expenses. It was felt MCA will help in providing better services to policy holders also.
The committee also sought to put in place certain protective mechanisms and felt that the insurance companies cannot completely absolve themselves from acts of omissions and commissions of their agents. It recommended that penalties on insurance companies be linked to seriousness of offences committed by them and suggested mechanism to ensure that there is minimum scope for subjective interpretation.
The panel suggested that adequate provisions should be made to prevent scope for misuse by the insurance companies and policy holders are not victimized for minor aberrations. As of now, any non-disclosure or wrong disclosure due to ignorance or lack of awareness allowed the insurer to repudiate a claim under the policy.
The committee also recommended inclusion of representatives of self-help groups and insurance cooperative societies and eminent persons not related with insurance business in life Insurance Council and General Insurance Council for better corporate governance. The committee urged the Government to examine the industry’s suggestion for a Separate Insurance Tribunal as appellate authority for the insurance sector. As of now, IRDA has the power to look into complaints. It suggested that any insurer or intermediary aggrieved by any order under the Insurance Act can go with an appeal to the Securities Appellate Tribunal. It also suggested inclusion of a person from the insurance industry in the Securities Appellate Tribunal as an expert. And, recommended necessary modifications in the Securities and Exchange Board of India Act, 1992, for the inclusion.
Based on the Supreme Court judgement that suggested there was no need for two categories of nominees - beneficiary nominee and collector nominee, the committee said that the Government in consultation with IRDA and law Ministry should modify the definition of the term “nominee” in order to remove any ambiguity or subsequent litigation.