After a four-year delay, the Union Cabinet today approved a Bill for comprehensive amendment of insurance laws, including a proposal to raise the foreign investment ceiling from 26 per cent to 49 per cent.
Finance Minister P Chidambaram told reporters that the plan is to introduce the Bill in Parliament when it reconvenes on December 10, but is unlikely to be cleared due to time constraints.
| OTHER PROVISIONS OF THE BILL |
As is the practice, the Bill will be referred to the standing committee before it comes back to the House. With the general elections due in the first half of 2009, the government intends to introduce the Bill in the Rajya Sabha so that it does not lapse when the Lok Sabha is dissolved.
“It is a positive way of keeping sentiment alive since it may be difficult for the government to see the Bill through,” said an insurance company executive.
Although the government was ready with the draft Bill a few years ago, it could not be taken up by the Cabinet for discussion since the Left parties, which were supporting the Congress-led government at the Centre, opposed greater foreign participation in insurance.
Apart from raising the foreign investment ceiling, another key amendment proposed is to give room to Indian promoters to continue to hold majority stakes in insurance companies. At present, the law requires Indian promoters to lower their stake to 26 per cent after the tenth year of operation.
Besides amending the Insurance Act, 1938, the Bill also proposes to amend the General Insurance Business (Nationalisation) Act, 1972, and the Insurance Regulatory and Development Authority Act, 1999.
To enable state run companies to raise more capital, the government will amend the General Insurance Business (Nationalisation) Act to allow them to raise capital from market.
The proposed change on FDI rules would not apply to public sector insurers like the Life Insurance Corporation of India, General Insurance Corporation and the four non-life insurance companies, which the government owns.
In the case of the private companies, most joint venture agreements provide for the foreign partner to increase its stake once Parliament approves the changes. In fact, most partners have already started the process of valuation for the transfer of shares to take place, industry sources said.
Though some foreign companies are facing a crunch in their home markets due to exposure to structured products, Ernst & Young’s Ashvin Parekh said that the overseas players will not find it tough to infuse the necessary capital.
“At best you will need another $2.5 billion across 35 life insurance companies and in most cases there will be staggered payments. So, even this amount will come over a period of two-three years,” he added.
Back-of-the-envelope calculations show that raising the foreign investment ceiling, which includes investment from non-resident Indians and direct investment to 49 per cent may increase the total inflows into the life insurance segment by almost two-and-a-half times from the current levels, Aviva India’s Designate-MD & CEO TR Ramachandran said.
“The Indian insurance industry has been waiting for this news for a long while. The move will surely inject adrenalin into the insurance industry,” said Royal Sundaram Alliance Insurance Company Managing Director Ajay Bimbet
“Life insurance is a capital-intensive business, so this move will definitely help these companies access capital to support their growth and expansion plans,” added Reliance Life Insurance CEO P Nandagopal.
