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A much-awaited Bill to raise the composite foreign equity cap in the insurance sector from 26 per cent to 49 per cent is likely to sail through in Parliament this session, following the Cabinet on Wednesday approving amendments to the Bill after the government got support from the Congress in this regard.
The amendments were recommended by a parliamentary select committee, without a dissent note from the main opposition party. The committee, chaired by Bharatiya Janata Party (BJP) Rajya Sabha member Chandan Mitra, also favoured the issuance of fresh equity for increasing stake, though it didn’t recommend making this mandatory.
“The Cabinet approved the incorporation of amendments suggested by a parliamentary select panel in the Insurance Laws (Amendment) Bill, 2008,” sources said. They added the Rajya Sabha was likely to take up the Bill next week.
The select committee opposed a cut in the minimum paid-up requirement for health insurers from the current Rs 100 crore but suggested such a reduction for cooperatives in insurance segments. It also sought a specific definition of control and ownership in insurance companies be incorporated in the Bill, expected to provide a much-needed boost to the government’s reforms agenda.
The National Democratic Alliance is short of a majority in the Rajya Sabha and requires opposition support for the Bill to be passed. With the backing of the Congress, it is expected the government won’t find it difficult to see the Bill through.
The only dissent against the Bill was from the Left, which is ideologically opposed to foreign direct investment (FDI) in the sector, as well as from the Trinamool Congress, the Janata Dal (United) and the Samajwadi Party.
Replying to a debate on supplementary demand for grants in Parliament, Finance Minister Arun Jaitley said, “We are ready to open the door in insurance sector; large investment is waiting to come.”
Earlier, many were divided over whether the committee would recommend a 49 per cent cap on FDI alone or include foreign portfolio investors as well. “The committee recommends the composite cap of 49 per cent should be inclusive of all forms of foreign direct investment and foreign portfolio investments,” the panel suggested in a report, given to Parliament on Wednesday.
Sanjay Tripathy, senior executive vice-president (marketing, product, digital and e-commerce), HDFC Life, said insurers would wait for the finer details of the Bill before taking any decision. He added smaller insurance players could see more investment from foreign partners, as these entities were in need of capital.
Tarun Chugh, managing director and chief executive, PNB MetLife, said, “At this stage, the sector needed long-term capital for growth and expansion, and this was possible only through FDI. Not only does FDI bring in capital and foreign exchange immediately into the economy, it also enables companies to invest further in managerial ability, technical knowledge, administrative organisation, and innovations in products and processes.”
Through a press note earlier this year, the government had included foreign institutional investors (FIIs) in the 26 per cent foreign equity cap in the insurance sector. The category of foreign portfolio investors includes FIIs.
The norms regulating listing of insurance firms are stringent and foreign portfolio investors can come into the sector only if these firms go public. Deepak Mittal, chief executive of Edelweiss Tokio Life Insurance Company, said large players in the sector were interested to increase stake to 49 per cent, adding activity in the initial public offering segment would begin only after players decided whether they required FDI, foreign institutional investment or both.
Rajesh Sud, chief executive and managing director, Max Life Insurance, said, “The select committee’s recommendations on the Insurance Amendment Bill, tabled in Rajya Sabha on Wednesday, is a welcome development and concludes a long-standing debate. It also indicates the Centre is acting quickly on important policy decisions. The recommendation on the increase in foreign capital to 49 per cent through foreign investors, including FDI and portfolio investors, will open capital coming into the country. Depending on each company’s stage of development and capital requirement, it will now have multiple options available. For some of the more established players, it opens up the possibilities of IPOs, as well as capital for acquisitions, which will allow consolidation in the sector.”
A senior executive from the sector said, “Some large players are interested in an IPO. However, several factors such as FIPB (Foreign Investment Promotion Board) approval or automatic approval, apart from clarity in Indian management control, will be sought before taking a decision.”
Amid a debate on whether equity should be raised only through issuance of fresh shares, the committee said, “Incremental equity should ideally be used for expansion of capital base so as to actually strengthen the insurance sector.” As such, it didn’t make fresh equity mandatory for raising the cap, but said this was the ideal route.
One of the arguments of the dissent notes — by P Rajeeve (Communist Party of India-Marxist), Derek O’Brien (‘Trinamool Congress), Ram Gopal Yadav (Samajwadi Party) and K C Tyagi (Janata Dal United) — was Indian companies would dilute their stake in favour of foreign investment, which wouldn’t increase the capital base of these companies. “There is widespread apprehension that the proposed increase in FDI will allow Indian entities to liquidate a portion of their stake and earn profits that would be several multiples of their original investment, without any fresh capital flowing into the insurance sector,” O’Brien said.
Earlier, there was speculation the committee might recommend a cut in the minimum paid-up capital requirement in the health insurance segment. However, it suggested retaining the requirement at Rs 100 crore, on a par with other insurance segments, saying any reduction “would encourage non-serious players to enter the field”.
The panel, however, recommended slashing this requirement for cooperatives so that these entities could access a market segment that hasn’t been accessed by large insurance companies.
For retaining ‘control’ and ‘ownership’ in Indian companies, the panel favoured including their definitions in the Bill. “The term ‘control’ shall include the right to appoint majority of the directors or to control the management or policy decisions, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements,” it said.
| SELECT PANEL RECOMMENDATIONS |
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