FDI boost for insurance sector

The finance minister, in the maiden Budget of the government, made a very important and a much awaited announcement relating to the insurance sector. The existing composite Foreign Direct Investment (FDI) limit in the insurance sector of 26% is now proposed to be increased to 49% through the FIPB route, with full Indian management and control.

This is a welcome move for the insurance industry, which is investment-starved, for long has suffered from muted growth and needs a major breather in the form of higher FDI.

Finance minister, in his budget speech, did mention that the benefits of insurance have not reached to a large section of people in India due to low insurance penetration and density. The increase in FDI limit would certainly help insurance companies get the much needed foreign capital from the overseas partners for expansion, and may also assist in resolving the issue of penetration of insurance.

The increase in the existing FDI limit up to 49% was one of the key amendments proposed in the Insurance Laws (Amendment) Bill, 2008 (‘Insurance Bill’). In his budget speech, the finance minister also made an announcement of taking up the Insurance Bill for consideration by the Parliament.  While it remains to be seen whether the increase is brought out by way of enactment of the Insurance Bill or by way of amendment to existing Insurance Act, 1938, a crucial point here would be that, in either case, approval would be required from both the houses of the Parliament.

The proposal to allow the increase in FDI is subject to retaining the full Indian management and control.  However, what is contemplated by full management and control will be known only after going through the fine print of the legislative/policy changes made in this regard.  The intention may be to retain majority of Indian management and control and for which conditions may be placed in the form of Indian promoters having right to appoint majority of directors or that majority of directors are Indian citizens (like in case of telecom sector) or key positions such as chairman or managing director or CEO or CFO or actuary be held by Indian citizens.

While the government has paid heed to the long standing demand of the sector, the industry players would now be eager to see quicker implementation of this reform measure by the government.  Not only the existing foreign promoters but even the private equity investors, foreign institutional investors, foreign portfolio investors, etc. would be keen on having financial interest in this sector.

(Radhakishan Rawal, Director assisted by Rajesh Bhagat, Senior Manager, PricewaterhouseCoopers Private Limited)

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