Budget 2021: Virus-boosted insurers get foreign tailwind; capital injection for PSBs
Photo Credit: VCCircle

Finance minister Nirmala Sitharaman announced steps in the budget aimed at boosting the capital base of public sector banks and insurance companies. 

The government raised the foreign direct investment (FDI) limit in insurance from 49% to 74%, which is expected to help insurers to bring in more capital from abroad. 

However, the new structure requires that a majority of the directors on the board and key management persons be resident Indians, with at least 50% of directors being independent appointees and a percentage of profits retained as general reserve.

Many welcomed the FDI move. “This was long overdue. The FM has also proposed that foreign ownership and control will be permitted with safeguards,” said Anuj Shah, partner at Khaitan & Co.

Raj Ramachandran, partner, J Sagar Associates, said, “The FDI move will help bring in more investments to scale up business in India.’’ 

He added that the step will help boost the sector given the likely inclination for more insurance cover in the pandemic. 

“FDI in insurance intermediaries has already been permitted up to 100%, so this was an expected next step to provide effective stimulus for the sector,” Ramachandran said.

Including the Life Insurance Corporation of India (LIC), there are 24 life insurance companies and 34 non-life insurers in the country, according to the regulator.

Many insurers have foreign partnerships. The expected increase in foreign money because of the policy change will help them bulk up their capital base. 

Already, Covid has resulted in improved business and private equity investments for the industry. 

Early January, VCCircle reported that Chennai-based Star Health and Allied Insurance Co. Ltd had firmed up plans for a large equity funding round that would involve existing and new investors,

Last month, cloud-based general insurance company Digit Insurance said it had been valued at $1.9 billion, following a $18.4 million (Rs 135 crore) funding round.

On the banking front, the government is looking to consolidate the financial capacity of public sector banks, with a recapitalisation of Rs 20,000 crore in the coming fiscal. 

During 2019-20, the government made a Rs 65,443 crore infusion into PSBs. To be sure, it never committed any capital in the last budget, instead encouraging PSBs to approach the capital market to raise additional money.

In 2017-18, the infusion was Rs 80,000 crore and in 2018-19 the capital injection amounted to Rs 1,06,000 crore.

The government also plans to divest shares in state-owned enterprises.

Other than IDBI Bank, it is proposing to take up the privatisation of two PSBs and one general insurance company in 2021-22. 

In 2021-22, the government would also bring the initial public offering of (IPO) of LIC.

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