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The amended Insurance Bill due to be tabled before Parliament in the Budget Session aims to increase the Foreign Direct Investment (FDI) limit from 26% (set in 1999) to 49%. It was expected that this limitwould have been increased in a conscionable period of time. FDI limits in other financial serviceswere lifted after five years; but for insurance it remains 26% even after 13 years.
In January, Indicus Analytics, released a study on ‘The Case for Increasing the FDI Cap in Insurance’. In setting a contextual background its prominent (economist)authorspoint out that India’s economic history is replete with missed opportunities. Growth and investment have invariably been impeded by misguided notions of self-reliance that – though argued for loudly by politicians to protect the national interest -- end up achieving the opposite.They add that the debateabout increasing FDI in insurance is similar towhen private domestic banks were opened up to FII. Such banks are now at the 74% FII limit(e.g. HDFC and ICICI). Thesebanks seem to be playing a much more prominent and useful role than they did before the limit was raised. But these banks were never set up with foreign joint-venture partners, as was the case in insurance.
The authors of the study highlight the fact that every initiative (bar none) taken to open India up to foreign investment has been beneficial; not just to the foreign investor and domestic JV partner but to India and the average Indian – whether employee, consumer, shareholder or stake-holder. Empirical evidence suggests overwhelmingly that foreign investment has delivered agreater common good than ever acknowledged by India’s political class, which still lives in an illusionary autarkic world.
The study further raises the question: “Is there anything special about insurance for rational arguments not to be applied?”Its researchindicates no reason why insurance should be treated differently. Instead the study finds that India is missing out on a huge opportunity by limiting FDI to 26% and observes that: “The threshold of 26% is a hang-over and artificial.”In fact, India has the lowest FDI limit in the world. In insurance, currently Korea, Taiwan and Mexico allow 100% FDI, cautious Malaysia allows 70%, the Philippines 51% and even China allows 50% FDI.
The study argues that the FDI limit in insurancemust be lifted to 49% and beyond. It highlights the increased need for: equity capital, further penetration and density, more financial inclusion, and benefits already brought by opening up the industry in 1999. These include: three million new jobs, new risk management practices and product innovation. In addition, it adds the advantage of the widening current account deficit being financed through greater capital account, non-debt, FDI inflows.
Economic and industry experts have all lined up in support of the Insurance Bill, including India’s own independent insurance regulatory body (IRDA) whoseChairman J Hari Narayan says is essential for the sector to grow. “It (FDI) will give a boost to the sector. And it is required any way. Otherwise, we don’t have required capital for the insurance sector.”
Yashwant Sinha, Chairman of the Joint Parliamentary Standing Committee on Finance had this to say as Finance Minister in 1999: “Mr. Deputy-Speaker, the world has progressed. There are all kinds of insurance products being marketed in various countries of the world, which are unfortunately not yet available in India. It is our belief that with opening up, it will be possible for those insurance products to come into this country and provide depth and weight to the market… Through larger coverage, it is possible to cover a larger segment of the population through health insurance. For instance, there are pension schemes. There are sections of employees, sections in the unorganized sector, who have no pension cover. Now, insurance companies could provide them pension facilities….. That will come in handy when they retire. Now this is the kind of social security which will become possible once insurance is opened up … that is why we are putting social service … obligations even on the newer companies.”
Every argument Sinhaas Minister made then is even more valid today. The achievements of these objectives require further capital and open markets in the expansion of insurance. They require a higher foreign investment limit.
Market theory and real life economic experience suggestthat higher growth is driven by competition and consumer choice. These two factors driveinnovation and efficiency. Efficiency drives growth. The source of competition, domestic or foreign, does not matter. Foreign partners in Indian insurance JVs are large multinationals investing for the long term. So, their investment in, and transmission of global best practices to, Indiacan only be enhanced if they are provided witha level-playing field, i.e. a fair, non-discriminatory business environment.
The study concludes that there can be no dispute about India needingto increase FDI in insurance if it is serious about achieving 8%+ growth and avoiding another missed opportunity. More importantly, it concludes that there is no case for FDI to be substituted for by Foreign Institutional Investors(FII) in the insurance industry. Nor is there a case for legislation which strait-jackets insurance JVs by insisting that any capital that comes in with an increase in the foreign limit must be exclusively in the form of new capital. The financial circumstances of insurance JVs are sufficiently diverse for legislation to be flexible enough to let company boards decide (and IRDA approve) what form/combination of capital (FDI or FII or both) should come inand whether it should be new. That would avoid situations of over-capitalisation and under-capitalisation. One size clearly does not fit all. The amended Insurance Bill should recognize and allow for that reality.
Munish Sharma is a partner in New Delhi office of Dua Associates and specializes in FDI and M&A.
Views expressed by the author are personal.
In January, Indicus Analytics, released a study on ‘The Case for Increasing the FDI Cap in Insurance’. In setting a contextual background its prominent (economist)authorspoint out that India’s economic history is replete with missed opportunities. Growth and investment have invariably been impeded by misguided notions of self-reliance that – though argued for loudly by politicians to protect the national interest -- end up achieving the opposite.They add that the debateabout increasing FDI in insurance is similar towhen private domestic banks were opened up to FII. Such banks are now at the 74% FII limit(e.g. HDFC and ICICI). Thesebanks seem to be playing a much more prominent and useful role than they did before the limit was raised. But these banks were never set up with foreign joint-venture partners, as was the case in insurance.
The authors of the study highlight the fact that every initiative (bar none) taken to open India up to foreign investment has been beneficial; not just to the foreign investor and domestic JV partner but to India and the average Indian – whether employee, consumer, shareholder or stake-holder. Empirical evidence suggests overwhelmingly that foreign investment has delivered agreater common good than ever acknowledged by India’s political class, which still lives in an illusionary autarkic world.
The study further raises the question: “Is there anything special about insurance for rational arguments not to be applied?”Its researchindicates no reason why insurance should be treated differently. Instead the study finds that India is missing out on a huge opportunity by limiting FDI to 26% and observes that: “The threshold of 26% is a hang-over and artificial.”In fact, India has the lowest FDI limit in the world. In insurance, currently Korea, Taiwan and Mexico allow 100% FDI, cautious Malaysia allows 70%, the Philippines 51% and even China allows 50% FDI.
The study argues that the FDI limit in insurancemust be lifted to 49% and beyond. It highlights the increased need for: equity capital, further penetration and density, more financial inclusion, and benefits already brought by opening up the industry in 1999. These include: three million new jobs, new risk management practices and product innovation. In addition, it adds the advantage of the widening current account deficit being financed through greater capital account, non-debt, FDI inflows.
Economic and industry experts have all lined up in support of the Insurance Bill, including India’s own independent insurance regulatory body (IRDA) whoseChairman J Hari Narayan says is essential for the sector to grow. “It (FDI) will give a boost to the sector. And it is required any way. Otherwise, we don’t have required capital for the insurance sector.”
Yashwant Sinha, Chairman of the Joint Parliamentary Standing Committee on Finance had this to say as Finance Minister in 1999: “Mr. Deputy-Speaker, the world has progressed. There are all kinds of insurance products being marketed in various countries of the world, which are unfortunately not yet available in India. It is our belief that with opening up, it will be possible for those insurance products to come into this country and provide depth and weight to the market… Through larger coverage, it is possible to cover a larger segment of the population through health insurance. For instance, there are pension schemes. There are sections of employees, sections in the unorganized sector, who have no pension cover. Now, insurance companies could provide them pension facilities….. That will come in handy when they retire. Now this is the kind of social security which will become possible once insurance is opened up … that is why we are putting social service … obligations even on the newer companies.”
Every argument Sinhaas Minister made then is even more valid today. The achievements of these objectives require further capital and open markets in the expansion of insurance. They require a higher foreign investment limit.
Market theory and real life economic experience suggestthat higher growth is driven by competition and consumer choice. These two factors driveinnovation and efficiency. Efficiency drives growth. The source of competition, domestic or foreign, does not matter. Foreign partners in Indian insurance JVs are large multinationals investing for the long term. So, their investment in, and transmission of global best practices to, Indiacan only be enhanced if they are provided witha level-playing field, i.e. a fair, non-discriminatory business environment.
The study concludes that there can be no dispute about India needingto increase FDI in insurance if it is serious about achieving 8%+ growth and avoiding another missed opportunity. More importantly, it concludes that there is no case for FDI to be substituted for by Foreign Institutional Investors(FII) in the insurance industry. Nor is there a case for legislation which strait-jackets insurance JVs by insisting that any capital that comes in with an increase in the foreign limit must be exclusively in the form of new capital. The financial circumstances of insurance JVs are sufficiently diverse for legislation to be flexible enough to let company boards decide (and IRDA approve) what form/combination of capital (FDI or FII or both) should come inand whether it should be new. That would avoid situations of over-capitalisation and under-capitalisation. One size clearly does not fit all. The amended Insurance Bill should recognize and allow for that reality.
Munish Sharma is a partner in New Delhi office of Dua Associates and specializes in FDI and M&A.
Views expressed by the author are personal.
