Centre eyes 49% FDI in insurance, capital for banks
The government is readying a host of reform measures in the financial sector, including easing of foreign investment norms for the insurance sector from 26% to 49% and an elaborate plan to infuse capital in state-owned banks.business Updated: Jun 03, 2014 01:25 IST
The government is readying a host of reform measures in the financial sector, including easing of foreign investment norms for the insurance sector from 26% to 49% and an elaborate plan to infuse capital in state-owned banks as part of a broad initiative to bring in dollars and instil confidence among investors.
The government may open up the private insurance sector, hobbled for capital, to foreign investment while capping voting rights of overseas investors.
The easing is likely to be done in a staggered manner, starting with non-life and health segments, followed by life insurance. Insurers need funds to maintain a healthy capital base, offer a wider bouquet of products and protect consumer interests against insolvency.
Insurance company stocks rallied by up to 10.5% on Monday amid anticipation of easier FDI norms. Reliance Capital shares rose 10.41%, while Max India rose by 10.05% on the BSE. Shares of Bajaj Finserv gained 3.15%, while Religare Enterprises was up 1.97%.
“We might increase FDI cap in insurance without commensurate increase in voting rights,” a government official said.
The Cabinet on Thursday approved a move to use part of the money it raises through disinvestment to bolster the capital base of public sector banks and insurance companies.
The government is also likely to draw up plans to infuse more capital to ensure the banks’ capital reserves do not remain too close to the minimum stipulated levels over the long term.
The real test for the government lies in getting these measures passed in Parliament.
The Insurance (Amendment) Bill that had proposed raising FDI limit to 49% has been pending in Parliament since 2008.
“In the current downturn, corporate asset quality has deteriorated due to a sustained deceleration in GDP, policy paralysis, high interest rates and higher corporate leverage,” said March research note of global brokerage firm UBS.
According to analysts, while the growth slowdown has hurt most sectors, iron and steel and the infrastructure sectors have been most hit by policy logjam.
Macquire Equities Research has said in a note that while banks are looking to sell bad loans to asset reconstruction companies, the latter do not have an appetite to buy more than 5-10% of stressed assets.