The insurance sector is all set for higher foreign direct investment (FDI). After dilly dallying for years, the government has approved raising the FDI cap from the existing 26% to 49%. The new investment norm which is part of the comprehensive insurance bill has been cleared by the cabinet on Thursday night. However, the amendment to the investment cap will take some more time for it to be implemented as the bill is likely to be presented to the parliament in the winter session in December.
The move comes at a time when the government is trying various policy measures to infuse liquidity in the financial system by easing norms for foreign investment in India.
While it has been awaited for a long time, the easing of foreign investment limit in the sector comes at a time when even large international insurance giants are facing tough times in the wake of the financial crisis gripping the global economy.
AIG, one of the world's biggest insurance majors was recently bailed out by the US government and it is now looking to sell assets including that in Asia. Europe's largest insurer Allianz (which has a JV with Bajaj Group) had in August said that its solvency ratio- which is an indicator of financial strength- has fallen below its targeted level in second quarter and analysts are already anticipating that it will cut dividends this year.
Aegon (JV with Religare) and ING (JV with Vysya) has decided to do away with final dividends. Prudential (JV with ICICI) has reported quarterly net loss while MetLife has reported a decline in profits.
This means all of the private insurance firms which operate through joint ventures with Indian companies may not necessarily rush to hike their equity stake in India.
Besides upping the foreign investment cap, the insurance bill once passed by the parliament, will also remove some old provisions to give more flexibility to the insurance regulator IRDA.