The government plans to increase foreign direct investment in the insurance sector to 49 percent with a rider that voting right of overseas partner will remain capped at 26 percent. The Insurance Laws (Amendment) Bill, 2008 proposes an increase in foreign holding in insurance joint ventures to 49 percent from the existing 26 percent with corresponding voting rights. Though the government has not seen much support with FDi in multibrand retail, it still might take up the issue of FDI in insuranceand pension. The proposal had been first floated by the UPA government though this government might have to complete the job.
The Finance Ministry now proposes an amendment to the the Bill, pending since 2008, by capping voting rights of the foreign partner to 26 percent even as FDI is raised to 49 per cent, sources said. This is being done in the interest of meeting the growing capital requirement of insurance companies which are highly capital intensive. Sources said the proposal says that equity shares of foreign company should not exceed 49 percent of total paid-up equity capital of an insurance company provided voting rights of such foreign shareholders are not exceeding 26 percent in aggregate.
Besides, the CEO of the insurance joint venture should be appointed by Indian shareholders subject to regulatory approvals, according to the proposal. The proposal also stipulates that the majority of company's directors should be Indian nationals. Sources said a draft Cabinet note by the Department of Financial Services to this effect has been circulated.
The proposal said the additional amendment would incorporate suitable safeguards and restrictions on foreign equity investment in the insurance sector while enhancing the overall cap to 49 percent as envisaged in the Bill. This is considered essential in the light of the prevailing economic and insurance industry environment and the sensitive nature of the subject of foreign equity investment, it said. The Standing Committee on Finance had earlier rejected the proposal to hike FDI in the insurance sector, saying it may not have the desired effect and could expose the economy to global vulnerability.
A cabinet note said, "The voting rights of such foreign shareholders shall not exceed 26 per cent in the aggregate and the CEO of the said Indian insurance company, to be appointed by its Indian shareholders …. and the majority of the company’s directors shall be Indian nationals."
The insurance sector might not be able to meet its requirement for funds from the market as it is going to show losses for next few years. Allowing foreign investment might be the relief tfor the sector.
The ruling BJP had earlier opposed raising the FDI cap in the insurance sector from 26 percent to 49 percent. The insurance sector was opened up to the private sector in 2000 after the enactment of the Insurance Regulatory and Development Authority Act, 1999.
Last month, Finance Minister Arun Jaitley had met CEOs of private sector companies to discuss issues related to capital requirements, including cap on foreign direct investment. The industry has been demanding raising FDI limit to 49 percent from 26 percent at present so that get the much needed capital to enhance their business.
With inputs from PTI