Cabinet clears 49% foreign investment cap for insurance

New Delhi: The Union Cabinet on Thursday cleared a Bill to raise the foreign investment ceiling in private insurance companies from 26 per cent to 49 per cent, but inserted a provision that the management and control of these companies must be with Indians. This cap will be composite — both foreign direct investment (FDI) and foreign portfolio investment.

Experts said this meant voting rights of foreign investors would not be capped at 26 per cent but they cannot have contractual agreements for control of insurance companies.

The Cabinet Committee on Economic Affairs this morning gave its approval to changes in the Insurance Laws (Amendment) Bill, which will now be taken up in the current session of Parliament.

EXPANDING THE SCOPE

Ceiling: Proposed to be raised from 26% to 49% Composite cap: Includes both FII and FDI inflows Rider: Management and control should stay with Indians Capital: Immediate inflows of around Rs 6,000 crore expected Benefit: Creation of jobs, long-term savings, innovative products Reach: More funds for expansion to improve insurance penetration Status: Currently, non-life insurance penetration is 0.78%, life insurance penetration is 3.2% Side-effect: FDI in pension sector will also go up from 26% to 49%

“The Cabinet has cleared raising the foreign investment cap in insurance to 49 per cent, subject to Indian management and control,” said a senior government official who did not wish to be named.

Later in the evening, Finance Minister Arun Jaitley said in the Rajya Sabha: “The decision to have a 49 per cent foreign investment cap for insurance was taken by the National Democratic Alliance government in its previous term, but we had agreed for a 26 per cent ceiling after the Congress party insisted on that. We have gone back to 49 per cent, our earlier decision.”

Officials said the definition of control would include the right to appoint a majority of directors or to influence management decisions, including by virtue of shareholding or management rights, or shareholders’ agreements or voting agreements. The term control will be defined in line with the FDI policy.

“The definition of ‘control’ in the FDI policy does not cap voting rights of foreign investors. But it does put restrictions on the parties to enter into any further contractual shareholders agreements, whereby the foreign partner has control over management and policy decisions of the company or appointing a majority of directors, despite having up to 49 per cent in the insurance joint ventures,” said Punit Shah, co-head of tax with KPMG in India.

The additional foreign capital expected to flow in from this decision across life, health and general insurance is Rs 20,000-25,000 crore. Immediately, Rs 6,000 crore could flow into the insurance sector once Parliament approved the Bill, experts said.

Higher foreign investment will provide capital to insurers struggling to expand, help increase insurance coverage in the country, create jobs, generate savings and pave the way for insurers to list on stock exchanges.

Non-life insurance penetration in India is only 0.78 per cent of the population, marginally up from 0.67 per cent 10 years ago. Life insurance penetration is 3.2 per cent, against 4.1 per cent in Asia.

All investment proposals beyond 26 per cent foreign investment in insurance companies will have to be routed through the Foreign Investment Promotion Board. Foreign investment up to 26 per cent will remain on the automatic route. The 49 per cent cap is composite, including foreign portfolio investment.

“Companies that are able to attract and access capital will be better positioned to consolidate their market shares. It is likely to trigger consolidation, as players with strong capital base might have a war chest to acquire weaker players,” said Monish Shah, senior director of consultancy firm Deloitte.

The proposal to raise the foreign investment cap in insurance has been pending since 2008. The Manmohan Singh government had in its first term introduced the Insurance Laws (Amendment) Bill in Parliament to raise the foreign investment ceiling to 49 per cent, but it was blocked by the Bharatiya Janata Party, which had argued opening up the sector further could expose the economy to global financial shocks. Parliament’s standing committee on finance, headed by senior BJP leader Yashwant Sinha, had recommended retaining the cap at 26 per cent. However, the Singh government, during its second term, tabled the revised Bill in the Rajya Sabha in 2013 to increase the ceiling to 49 per cent. Since the Bill was in the Rajya Sabha, it did not lapse with the dissolution of the previous Lok Sabha. The Cabinet on Thursday revised this Bill.

Finance Minister Arun Jaitley had said in his Budget speech earlier this month the insurance sector was starved of investment and there was a need to increase the composite foreign investment cap in the sector to 49 per cent.

“This should bring in domain capital, which is of critical importance in this phase of growth of the life insurance industry,” said Rajesh Sud, CEO & managing director of Max Life Insurance.

Scrips of listed insurance companies on Thursday surged as much as four per cent after the Cabinet decision.

Along with the increase in the foreign investment cap in insurance, foreign investment in the pension sector will also go up automatically. At present, the FDI cap in the pension sector is 26 per cent, the same as insurance.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.