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Reforms: inside the second round

Unfazed by continuing opposition to recent moves such as foreign direct investment in retail and diesel price hike, the government announced another round of big-ticket reforms last week. Gaurav Choudhury takes a look at the finer details

business Updated: Oct 10, 2012 01:54 IST
Gaurav Choudhury

What are the major reform measures that the government has announced last week?
Last Thursday, the Cabinet approved bills to open up insurance and pension sectors to foreign investment, apart from a slew of other measures, which together are boldest reforms proposals initiated by the UPA government since assuming power in 2004.

What has the government proposed for the insurance sector?
The government approved the politically contentious move to hike the foreign direct investment (FDI) ceiling to 49% from the current 26% in India’s rapidly growing private insurance sector, which was being hobbled by lack of capital.

Why do insurers need money?
Insurers need funds to maintain healthy capital base, offer a wider bouquet of products and protect consumer interests against insolvency.

By when can one expect the cap on FDI in insurance to be hiked?
The passage of the Insurance (Amendment) Bill that has proposed raising the FDI limit to 49% remains uncertain. The bill has been pending in Parliament since 2008 for lack of political consensus. The Left parties and the estranged ally of the ruling coalition Trinamool Congress led by West Bengal chief minister Mamata Banerjee are opposed to the Bill. The government plans to introduce an amended bill in the winter session of Parliament this year.

What about the pension sector?
The Cabinet also cleared a bill to allow up to 49% foreign investment in the pension industry..

But isn’t there already a regulator in the pension sector?
The pension sector has its own regulator, Pension Fund Regulatory Development Authority (PFRDA). However, it is yet to get statutory powers through an Act of Parliament. PFRDA’s National Pension System (NPS) was introduced by the government and made mandatory for all new recruits to the government with effect from January 1, 2004. The NPS was opened to all citizens of India from May 1, 2009 on voluntary basis.

How was the PFRDA created if the bill has not been passed?
The interim PFRDA is functioning since 2003 through an executive order. Unlike the other financial services regulators such as the Reserve Bank of India, PFRDA does not have statutory status. Consequently, PFRDA does not have the quasi-judicial powers of other regulators.

What is the drawback of not having statutory powers?
The drawback of not having statutory powers is that if one of the entities PFRDA regulates violates norms, it cannot impose penalties. Passage of the PFRDA Bill, which introduced in the Lok Sabha in March 2011, is important to pave the way for setting up a regulator for the sector aimed at providing social security to millions of employees through efficient intermediation of long-term household savings.

When is the PFRDA Bill likely to be passed?

The government plans to introduce an amended bill in the winter session of Parliament, but could face strong opposition from Trinamool Congress Left parties.

What about the Companies Bill?
The Cabinet also approved amendments in the Companies Bill to overhaul India’s corporate governance norms, make directors more accountable and give individual shareholders more powers to defend their rights.

What does the Companies Bill seek to achieve?
The bill, once voted into law by Parliament, would mark the end to more than three years of debate and discussions to legislate a framework for checks and balances to prevent frauds, make corporate board room decisions transparent and hold auditors and directors more accountable. The legislation, will replace the 56-year old Companies Act 1956. It will empower the Serious Fraud Investigation Office (SFIO), an agency mandated to investigate corporate scams, with a statutory status armed with the authority to file chargesheets, impose punitive measures and in specific instances, even arrest persons found guilty of corporate crimes. It will allow shareholders’ associations to take legal action against companies’ promoters and management through ‘Class Action Suits’.