On table: 74% FDI cap for insurance

New Delhi: The government is considering a higher limit for foreign investment in the insurance and pension sectors, currently pegged at 49% of paid-up equity capital. The proposal under consideration is to raise the limit to 74%, on par with that for private banks, an official aware of deliberations told ET.

“There is a view that both the insurance and pension sectors can be further opened up with existing clauses that management control is held by Indians, as applicable in banks,” said the official.

In her 2019 budget speech, finance minister Nirmala Sitharaman had said that the government will explore further easing the foreign direct investment (FDI) limit in insurance. The Insurance Regulatory and Development Authority of India (IRDAI) has also backed an increase in the limit to 74%.

A decision is expected at the highest political level ahead of the budget, as raising the limit will require an amendment to the Insurance Act. While such a move would help insurers attract more capital to expand business, it would also potentially boost the government’s divestment programme.

Better Valuations for Stakes

The Centre is looking to sell its stake in general insurance firms and a higher foreign investment limit could fetch better valuations, the official added.

The government had raised the overseas limit, including direct and portfolio investment, for both the insurance and pension sectors to 49% in 2015. Overseas investment in pension funds is allowed under the Pension Fund Regulatory and Development Authority (PFRDA) Act, 2013.

Insurance companies should be Indian owned and controlled under the law, which would need to be reviewed if the limit is raised.

“The government needs to revisit the Indian owned and control clause,” said an industry executive. “It will be difficult for the foreign partners to convince their parent firm to pump in more money without actually having a say on the board.”

Industry lobby groups have also sought a more liberal FDI policy, citing the high amounts of capital companies will need to expand if India is to increase penetration. Overall insurance penetration was 3.7% (premium as percentage of GDP), according to the latest IRDAI data, which is for FY18. Life insurance penetration stood at 2.74%, while non-life was 0.97%.

Experts said an increase in the FDI limit will provide an impetus to the industry to scale up and help lift the pandemic-hit Indian economy.

“Insurance business requires huge capital and deep pockets and with the increase in FDI limits, additional infusion of capital into the business could enable growth in the industry,” said Vikas Vasal, national managing partner, Grant Thornton Bharat.

The government has already allowed 100% foreign investment in insurance intermediaries such as brokers, consultants, third-party administrators, surveyors and loss assessors.

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