The Cabinet on Thursday gave go-ahead to Foreign direct investment (FDI) cap hike in insurance to 49 per cent with a rider that management control will remain in the hands of Indian promoters, thus paving way for inflow of as much as Rs 25,000 crore foreign funds in the sector.
The approval to hike the FDI limit from the current 26 per cent, a proposal which has been pending since 2008, is expected to attract long term capital, besides improving the overall investment climate.
This is the first major reform initiative by the Narendra Modi-led NDA government, and has raised expectations of further relaxation of FDI norms in sectors like defence and railways.
"The CCEA has approved raising of FDI cap in insurance sector to 49 per cent from 26 per cent," sources said, adding that all investment proposals beyond 26 per cent will have to be approved by the FIPB and Indian promoters will continue to have the control of the management.
With the Cabinet approving the amendments to the long pending Insurance Laws (Amendment) Bill, it will now be taken up by Parliament.
According to KPMG, the higher cap could fetch investments up to Rs 25,000 crore.
"Once there is proper clarity on the interpretation of control by Indian promoter, the additional foreign capital expected across life, health and general insurance companies is between Rs 20,000 to 25,000 crores," KPMG (India) Partner Shashwat Sharma said.
After the Bill is passed by Parliament the same norms for foreign investment will apply to the pension sector as well.
"FDI in insurance sector will also strengthen the capital flows in the coming time... It would go a long way to rebuild investment sentiments in the country," PHD Chamber of Commerce & Industry president Sharad Jaipuria said.
There are about two dozen private sector insurance firms both in life and non-life segment.