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While insurance companies have welcomed the proposal, the emphasis on Indian management control is seen as a dampener for foreign investors. In addition, there was not much clarity if voting rights will be capped.
TS Vijayan, Chairman of Insurance Regulatory and Development Authority (Irda) said increase in FDI is a positive move and it will boost insurance penetration. He said the insurance industry needs capital to grow, whether it comes from Indians or foreign entities. Going forward, he said that it will enable companies in this space (who were waiting for FDI cap hike) to list on the stock exchanges thereby leading to better scrutiny of management by shareholders.
More foreign companies who are not yet present in the Indian market may also enter the space. Deepak Mittal, managing director and chief executive of Edelweiss Tokio Life Insurance said that more international players in the sector waiting in the wing would be motivated to enter India if FDI cap is raised.
The Cabinet on Thursday cleared the Insurance Laws (Amendment) Bill proposing raising the foreign direct investment (FDI) cap in insurance from 26 per cent to 49 per cent through the Foreign Investment Promotion Board (FIPB) route. The Bill now awaits Parliament's nod. The previous United Progressive Alliance (UPA) government also wanted to raise FDI in insurance to 49 per cent, but could not pass the Bill due to opposition from several parties including the BJP, which is now the ruling party.
Amitabh Chaudhry, managing director and CEO of HDFC Life Insurance, said if the cap on voting rights is removed, foreign investors will get both economic and voting powers.
"We are hopeful of the Bill being passed. If the Bill is passed, at least $3-3.5 billion inflows would come into the insurance sector. Further, if voting rights are not capped, then the foreign joint venture partners would be able to get economic rights as well as voting powers," Chaudhry noted.
On the issue of Indian management control, an industry official said if 49 per cent FDI came with caveats that reduced the foreign partner's say in key decisions of the company, there would be a delay in decision-making among these partners.
The increase in FDI cap will also attract new foreign players in the country. "This shall definitely evoke interest of global players present in India as well as those planning an imminent entry. Once there is proper clarity on the interpretation of control by Indian promoters, the additional foreign capital expected across life, health and general insurance companies is Rs 20,000-25,000 crore," said Shashwat Sharma, partner, KPMG in India.
Some insurance companies such as Reliance Life and Liberty-Videocon General Insurance have an understanding with their existing foreign partners that they could increase their stake whenever law permits 49 per cent FDI. Players such as Religare Health Insurance and Exide Life Insurance which have , where Indian promoters have about 100 per cent stake, can also take this opportunity for foreign participation.
M Ravichandran, president (insurance) at TATA AIG Insurance, said that FDI inflows into India after the insurance Bill is passed will be substantial not only from existing partners but from prospective entrants as well. He said apart from insurance companies, this would also be positive in the distribution space where a lot of foreign players want to enter the broking space with higher FDI.
"Life insurance companies where more capital is required would contribute more to the FDI inflow," said Ravichandran.
Finance Minister Arun Jaitley in his Budget speech said that the FDI cap will be raised to 49 per cent in the insurance sector. He said the composite FDI (including investment from non-resident Indians or NRIs, and foreign institutional investors or FIIs) cap has been raised to 49 per cent.
"The insurance sector is investment-starved," said the FM, citing the reason for a need for additional capital in the industry.
Bhargav Dasgupta, managing director and CEO at ICICI Lombard General Insurance, said: "It is heartening to see the Bill being cleared by the Cabinet within two weeks of the Budget announcement. While one will await its passage through Parliament, there are other important provisions of the proposed Insurance Bill over and above the capital structure that will benefit companies and, therefore, customers."
Earlier this year, the Department of Industrial Policy and Promotion ( DIPP ) had said that FIIs and NRIs can now invest in the insurance sector, within the overall 26 per cent cap on FDI.
At the moment, up to 26 per cent FDI is permitted in the sector. In a press note, DIPP said that apart from insurance companies, the relaxation would apply to insurance brokers, third-party administrators (TPAs), surveyors and loss assessors. All of this investment can be made under the automatic route.
The Arvind Mayaram committee on definition of FII and FDI had also suggested composite caps whereby FDI, FII and NRI investments would form part of the total cap on foreign investments.
Stocks of Reliance Capital went up by 4.05 per cent on the Bombay Stock Exchange (BSE) compared to previous day's close. Max India stocks were also up by 0.91 per cent at Rs 322.35 on BSE.
UMBRELLA GETS BIGGER AND BIGGER
- The Cabinet on Thursday approved the hike in FDI cap from 26 per cent to 49 per cent through the FIPB route
- However, the Clause on Indian management control could act as constraint in attracting foreign players
- In a press note, DIPP says apart from insurance companies, the relaxation would apply to insurance brokers, third-party administrators (TPAs), surveyors and loss assessors
