51% FDI cap for health insurance

Minimum capital requirement likely to be Rs 50cr.

The Insurance Regulatory & Development Authority (Irda) is in favour of a 51 per cent foreign investment limit for standalone health insurance companies.

"The taskforce has suggested a 51 per cent foreign capital limit and a minimum capital requirement of Rs 50 crore. The matter is under discussion with the government," Irda member CR Murlidharan told reporters on the sidelines of the India Economic Summit 2005.

At present, the foreign investment limit for insurance is fixed at 26 per cent and Finance Minister P Chidambaram has proposed to raise it to 49 per cent. The government has, however, not managed to increase the cap due to opposition from the Left parties.

Foreign insurance companies have been demanding a lower capital requirement for setting up standalone health insurance companies. They are of the opinion that health insurance is not as capital intensive as life insurance.

A number of international health insurance majors had earlier proposed to enter the Indian market but did not seek a licence after the government prescribed a minimum capital requirement of Rs 100 crore.

Permitting a lower capital requirement and a higher foreign investment ceiling will require an amendment to the Insurance Act, 1938.

Irda recently approved a licence for the first health insurance company Star Health & Allied Services, which will commence operations with Rs 110 crore capital. Murlidharan said two-three other applications were pending with the regulator.

The taskforce has also suggested a comprehensive database for all ailments covered under health insurance policies, Murlidharan said.

Irda is also of the opinion that insurance companies should be able to diversify their investment portfolio. "We want them to be able to invest in infrastructure bonds. This will also require some legislative changes," he added.

The insurance regulator intends to consult the Reserve Bank of India and the Securities & Exchange Board of India for allowing insurers to invest in derivatives and securitised assets including those of infrastructure companies.

"We will take up the issue of allowing insurers to invest in derivatives at the high-level committee on capital markets," Murlidharan said. Irda also plans to consult the National Housing Bank on allowing insurers to invest in mortgage-backed securities.

The present investment norms allow the insurance companies to invest in corporate bonds that enjoy AA and above rating as part of their investment in approved securities. Derivatives and securitised assets are not yet recognised as negotiable instruments and therefore cannot be treated as approved securities.