The Union cabinet on Thursday approved a proposal to ease foreign direct investment (FDI) limit in the domestic insurance sector to 49% from 26%, signalling the NDA government’s intent to draw capital and investment into an economy that is struggling to claw out of a crippling slowdown.
“The Cabinet Committee on Economic Affairs (CCEA) has approved raising of FDI cap in the insurance sector,” a source said.
The move, however, comes with a rider that management control of these companies will remain with Indian promoters. The higher FDI ceiling will come into force after Parliament passes the Insurance Laws (Amendment) Bill that has been pending since 2008 for lack of political consensus.
The effects were visible: investor sentiments rose, stocks rallied with the Sensex rising 125 points to log a new closing peak of 26,271.85.
Overseas investment proposals beyond 26% will have to be approved by the Foreign Investment Promotion Board, the nodal agency that vets FDI applications.
Insurers need funds to maintain healthy capital base, offer a wider bouquet of products, protect consumer interests against insolvency and deepen insurance penetration in India.
“The insurance sector is investment-starved. Several segments need an expansion,” finance minister Arun Jaitley told Rajya Sabha while replying to the discussion on Budget 2014-15.
India’s private insurance industry needs an estimated $6 billion (Rs 36,000 crore) of additional capital over the next five years
Life insurance penetration, defined as the ratio of premium underwritten in a given year to the GDP, is about 3.17% of GDP in India, lower than more than 10% in Japan and about 6% in Australia.
Of the 24 life insurance companies in India, only 17 reported profits in the last fiscal.
A higher FDI cap in the insurance sector will also automatically ease FDI norms in the pension sector. The Pension Funds Regulatory Development Authority Act, enacted last year, stipulates that foreign investment ceiling in the pension sector should be identical to the insurance sector.
Jaitley pointed out that rising costs of hospitalization demonstrate the need for increasing insurance penetration in India, for which companies need additional capital.
He said that contrary to perception that the BJP was opposed to the easing of foreign investment norms in insurance, it was actually the previous NDA government that first proposed raising the FDI ceiling in insurance to 49%, and that the Congress, then in the opposition, was opposed to it.
“When the UPA came to power, wisdom dawned upon them on raising FDI cap to 49%. By December, we had made considerable headway on this,” Jaitley said.
“Once approved by Parliament, this move should bring in 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 the life insurance industry,” Rajesh Sud, CEO and managing director, Max Life Insurance, said.