Business Standard: July, 2014
Mumbai: The government has proposed dropping a crucial rider for increasing the foreign direct investment (FDI) limit in the insurance sector to 49 per cent from the current 26 per cent. The earlier proposal was that the higher FDI limit would be allowed only for health insurers.
A draft note to the Cabinet, prepared by the Department of Financial Services on the official amendment to the Insurance Amendment Bill, 2008, has dropped the rider. The idea about enhanced FDI limits in only certain areas of the insurance sector was not tenable, as both life as well as general insurance areas required access to capital, the note said. In any case, most general insurance companies were already offering health insurance, the note said.
In its proposal to increase the total holding of a foreign company to 49 per cent, the department, however, has stuck to its earlier stand that caps voting rights at 26 per cent - the current investment cap. Also, the chief executive officer (CEO) of the insurance company will be appointed by Indian shareholders subject to approval of a competent authority and a majority of the company's directors will have to be Indians.
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The proposal says the official amendment will incorporate suitable safeguards on foreign equity investment in the insurance sector while enhancing the overall cap to 49 per cent. Industry players feel the government has taken this decision to reduce voting in order to facilitate the passage of the Bill. Said Amitabh Chaudhry, managing director & CEO, HDFC Life: "It is a good first step. I would believe that the government wants to reduce the voting rights because it would make the passage of the Bill easier."
According to industry sources, the rise in FDI would bring in around $1 billion (around Rs 6,000 crore) of foreign investment. Insurance penetration has been falling in India consistently. Between 2008-09 and 2013-14, insurance penetration has fallen from 4.6 per cent to 3.9 per cent, according to a Swiss Re sigma study.
In a meeting held on May 31, chaired by the finance secretary with all the stakeholders, including the Life Insurance Council, General Insurance Council and insurance players, issues related to the capital needs of the insurance sector were discussed. Insurers, in fact, had proposed that ideally the increase in limit without any qualification. They were also sceptical about restricting FDI in insurance to only one particular sector, say medical insurance.
Insurance players, however, felt the government was being overcautious because in case of banks which manage depositors' money, foreign holdings of 75 per cent are allowed. Also, they said even if voting rights were increased to 49 per cent, it wouldn't have made any substantial difference because the joint venture agreements were tight enough to protect Indian shareholders. "With the reduction in the voting rights, foreign players may seek a discount now," said Chaudhry.
However, insurance players also admit since the Bill has been in cold storage for a long time, any forward looking move was welcome. The Bill has been pending in the Rajya Sabha since 2008. Said K K Mishra, CEO, Tata AIG General Insurance: "This Bill has been pending for so long that I believe that whatever the government plans to do, it should do fast."