The Telegraph
Since 1st March, 1999
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Hint of big-bang insurance reforms

New Delhi, March 20: The Congress-led government wants to not only raise foreign direct investment in insurance companies to 49 per cent from the existing level of 26 per cent, but also remove a 10-year lock-in on Indian promoters who wish to pare their shareholding.

The changes in insurance regulations — which include a proposal to allow foreign re-insurance companies with net-owned funds of Rs 5,000 crore or more to operate in India through local branches — were shown as a presentation to Left leaders who met the Pranab Mukherjee-led group of ministers on insurance today.

The Left predictably remained dead against any changes in the current FDI of 26 per cent in insurance.

However, they indicated that more meetings would follow to discuss the other points. Officials said a modified bill could be brought in incorporating the changes that the Left did not object to — and leaving out those that the Left still continued to oppose.

A copy of the draft changes with The Telegraph reveals far more wide-ranging changes than a mere tweak in the FDI cap, which the Left has always remained opposed to.

“We remain unconvinced by the government’s arguments that Indian promoters do not have any money to invest in insurance and hence there is a need to increase the FDI limit,” said CPI leader Gurudas Dasgupta after the meeting with GoM members, including finance minister P. Chidambaram and plan panel deputy chairman Montek Singh Ahluwalia.

However, Abani Roy, RSP leader and member of the Left-UPA coordination committee, added, “There will be more meetings and we will discuss other amendments that they want to bring. We need time to digest everything before responding.” Roy said a detailed response would come after the Left had discussed the amendments among themselves.

The draft changes say the definition of Indian insurance companies has to be changed from one where foreign equity is limited to 26 per cent to public limited companies with foreign holdings of up to 49 per cent. If this is implemented, it would not only increase the FDI cap but also force insurance companies to go public and possibly list on Indian bourses.

However, the draft also removes a restriction imposed on Indian promoters that bars them from diluting their stake for the first 10 years. If this is adopted, the insurance sector could see a spate of mergers and acquisitions.

The draft also changes the definition of foreign companies allowed to invest in Indian insurance companies to specifically permit Lloyd’s of London to enter the Indian market. Lloyd’s has been unable to enter the Indian insurance space as it is not a company but rather a council set up by a separate act of the British Parliament. Chidambaram had promised the visiting British chancellor for the exchequer a few weeks back that he would ensure that Lloyd’s was allowed to enter India.

Analysts, however, say the most important change is the proposed opening up of the re-insurance sector, which till now is restricted to just the state-run General Insurance Corporation, which acts as the national re-insurer. The changes will allow foreign re-insurers like Swiss Re and Munich Re to open their offices here and attract re-insurance business directly.

The draft seeks to make underwriting of third-party motor insurance compulsory as it is the most unprofitable segment. It also wants to lower capital requirement for health insurance to Rs 50 crore from the current Rs 100 crore to attract more players and to remove obligations to do insurance work in rural areas and among poor, for health, agriculture and re-insurance businesses.

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