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Cabinet clears FDI in pension, insurance sectors

04 October, 2012

The union cabinet green signaled another series of economic reform measures including long pending moves such as hiking the foreign direct investment (FDI) limit in insurance sector and opening pensions to foreign investment while giving nod to the Companies Bill and amendments to The Competition Act on Thursday.

The top decision making body of the government approved bills for foreign investment in insurance and pensions sector which allows foreign investment up to 49 per cent in insurance from the existing 26 per cent. The decision also opens pensions sector which was closed to foreign investment till date.

Even as this decision would await a final nod at the parliament, with the cabinet clearing this among other measures the government has sent another signal that it is shrugging off the so called policy paralysis to get the slowing economy back on track. Now the central government needs to get a political buy-in to see through the reform measures.

Ahead of the cabinet decision, which was widely anticipated, the 30-stock benchmark index Sensex rose 1 per cent and closed at its highest level in more than a year.

The latest moves comes just weeks after the government announced bold measures opening multi-brand retail sector to FDI, cutting subsidies on fuel, allowed foreign carriers to buy stake in Indian airlines and hiked foreign investment limit in broadcasting sector, amidst stiff political opposition.

Hiking FDI limit in insurance has been long pending and even as it falls short of giving control to foreign partners in such ventures, a move up from 26 per cent is expected to see a slew of deals where international insurance firms buy out stake held by local partners. It would also give more comfort level for new insurance firms to enter India.

“It has been a long pending step in the right direction to boost the confidence of the global insurers and investors. The insurance industry has been struggling for a while on capital, which will be now be forth coming. There should also be more product and channel innovation with increase in completion expected,” said Shashwat Sharma, partner at consultancy firm KPMG.

Other Highlights:

* Nod to give autonomy and power to Forward Market Commission (FMC) and allowing ‘options’ in commodity market. This will benefit various stakeholders including farmers to take benefit of `price discovery and `price risk management`.

* Approves amendments to Companies Bill 2011 with various provisions including exceptions in separating the role of chairman and managing director, independent directors, clarity on definition of private placement, auditing etc.

* Amendments to the Pension Fund Regulatory and Development Authority Bill 2011 allowing subscriber to opt for schemes with minimum assured returns; withdrawals up to 25 per cent of the contribution before the maturity date etc

* Declared five airports including those at Lucknow, Varanasi, Tiruchirapalli, Mangalore and Coimbatore as international airports. The move would provide more routes for international carriers to pick and drop passengers.

* Relaxed capitalisation norms for health insurance to Rs 50 crore (instead of Rs 100 crore for general insurance companies) to reduce the entry barrier

* PSU general insurance companies and GIC will be permitted to raise capital from the market to meet future capital requirements, provided that the government’s shareholding would not be allowed to come below 51 per cent at any point of time.

* Cleared amendment to the Competition Act 2002, by changing the definition of “turnover”, “Group”, reducing the overall time limit of finalization of combinations from 210 days to 180 days and insertion of a new Section 5A enabling the central government to lay down, in consultation with the Competition Commission of India, different thresholds for any class or classes of enterprises for the purpose of examining acquisitions, mergers and amalgamations by the Commission.

* Cabinet committee on infrastructure (CCI) approved the Model Tripartite Agreement for Infrastructure Debt Funds (IDFs). IDFs would provide a vehicle for refinancing the existing debt of infrastructure projects which are funded mostly by commercial banks. This would create fresh headroom for commercial banks and enable them to take up a larger number of new infrastructure projects. An IDF can be structured either as a company or as a trust. If set up as a trust, it would be regulated by SEBI under the Mutual Fund Regulations. If set up as a company, the IDF would be structured as a Non-Banking Finance Company (NBFC) and will be under the regulatory oversight of RBI. Guidelines with enabling provisions have already been issued by the Reserve Bank of India and SEBI. An IDF-NBFC would issue either rupee or dollar denominated bonds and invest only in debt securities of Public Private Partnership projects which have a buy-out guarantee and have completed at least one year of commercial operations. Such projects are expected to be viewed as low-risk investments and would, therefore, be attractive for risk-averse insurance and pension funds.


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Cabinet clears FDI in pension, insurance sectors

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