The Union cabinet has approved changes to the Insurance Act for increasing the foreign direct investment (FDI) limit to 74 per cent from the present 49 per cent.
With the cabinet’s nod, the changes will be introduced in Parliament for approval. Once the Parliament approves the changes, the process to bring an applicable framework would start, an official said.
In her Budget speech for 2021-22, Finance Minister Nirmala Sitharaman had proposed the increase to allow foreign ownership and control with safeguards.
“Under the new structure, the majority of Directors on the Board and key management persons would be resident Indians, with at least 50 per cent of directors being Independent Directors, and specified percentage of profits being retained as general reserve,” she had said.
The applicable safeguards would be brought separately through rules, the official quoted above said. The government is in the process of finalising the rules, and the applicable framework for foreign ownership will be notified once the amendments are enacted, he added.
Estimates indicate insurance companies might require additional Rs 15,000 crore of capital over the next three years, which could be made easier with enhancement of the FDI limit, said Divakar Vijayasarathy, Managing Partner at DVS Advisors LLP.
As of March 2020, average foreign investment in 23 life insurance companies was 37.41 per cent. Only in nine private life insurers, the foreign investment has touched 49 per cent.
In 21 private general insurers, average FDI stood at just 28.18 per cent. In the standalone health insurance industry, average FDI is 30.22 per cent/ For and for the overall non-life industry, average FDI stood at 20.22 per cent.
The increase of the FDI limit will provide insurance companies with committed funds to improve the penetration of insurance in the country, said Prashant Tripathy, MD and CEO of Max life Insurance.
“It will also bring in better technical know-how, innovation, and new products to the advantage of the consumers.
We are confident that the increase in FDI will make the insurance sector more competitive, transparent, and efficient. Ultimately, this will improve business prospects and lead to greater employment generation in the country,” Tripathy said.
The decision to relax the FDI cap in the insurance sector, after repeated demands by the industry over the years, may have mixed results as far as fresh capital infusion into the sector is concerned.
According to industry insiders, in case the foreign joint venture partners decide to raise the stake, provided the Indian partner is ready to relinquish ownership, then money will change hands between the existing shareholders. No fresh capital will come in unless the foreign partner decides to infuse funds after raising its stake.
Substantial capital will flow into the sector only if the firms that have so far stayed away from the Indian insurance sector because of the ownership clause decide to set up new ventures.
Experts have earlier suggested that the move will most likely benefit the small players, where currently the Indian partner is not able to bring in more capital to boost growth. In such cases, the foreign partner will have the opportunity to bring in more capital and take control of the companies so that they can compete with the larger players. Even private equity funds could pick significant stakes in such companies.
The large insurance companies are well capitalised and backed by strong Indian partners, mostly banks and large non-banking players, who would not, in all probability, shed their stake in a business that generates substantial fee income.