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Friday , October 5 , 2012
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October revolution in reforms
Insurance FDI cap up to 49%

P. Chidambaram in New Delhi on Thursday. Picture by Prem Singh

New Delhi, Oct. 4: The reform-minded UPA government today decided to allow foreign investors to raise their stake in insurance companies to 49 per cent, brushing aside the recommendation by the parliamentary standing committee on finance which had wanted the limit to be retained at 26 per cent.

Unleashing its second round of big-ticket reforms, the Union cabinet decided to allow foreign investment in pension funds, permitted options trading in the commodity exchanges, approved a new competition law, framed a new companies law designed to improve corporate governance, and cleared the 12th Five Year Plan.

“The insurance regulator has categorically stated that insurance requires huge capital. It will only come if we can raise the FDI limit,” finance minister P. Chidambaram told reporters after the cabinet meeting.

The Insurance Regulatory and Development Authority (IRDA) has projected the capital requirement of the insurance sector at Rs 61,200 crore over the next five years. It said Indian investors, who have already pumped in Rs 21,000 crore, would not be ready to fork out more as they haven’t received any dividend from these operations in the past decade.

Foreign investors, who have very deep pockets, have been eyeing the prospect of tapping into a market with tremendous potential. India has an insurance penetration of 4.61 per cent in the life insurance business and 0.61 per cent in the general insurance business.

In terms of insurance density, which measures per capita spending on insurance in terms of US dollars, India is placed at a lowly 77th out of 88 economies at just $54.3 versus $121.2 in China and $1987.2 in South Korea.

The minimum capital requirement for health insurance companies has been set at a less onerous Rs 50 crore against Rs 100 crore for the general insurance segment.

The state-owned general insurance companies have also been allowed to go to the capital market to raise funds. However, care will be taken to ensure that the government stake does not fall below 51 per cent.

“This will bring in domain capital to the industry. The insurance bill has several other important elements which, once approved in Parliament, will have a long-term impact on the development of the sector,” said Rajesh Sud, CEO & managing director of Max Life Insurance.

The other big decision was to allow options trading in the commodities exchanges after a space of 60 years.

Proponents of options trading believe that it will give farmers a risk management tool. It will give them a price discovery option that will help them choose the crop they want to grow long before the sowing season begins.

Detractors of the proposal say options trading was banned in 1952 because it was considered a risky tool that could cause volatile swings in commodity prices — and there’s no reason to believe it won’t happen now.

Competition Act

The government also cleared the Competition Act, 2007 which will give search and seizure powers to the Competition Commission of India (CCI) to help it to investigate companies indulging in unfair trade practices.

“All sectors are now under the Competition Commission of India,” said Chidambaram.

In addition, mergers would be deemed to be approved within 180 days instead of 210 days at present.

At present, all mergers over a specified value have to be approved by the the CCI.

Giving search and seizure powers to the CCI will help the director-general (investigation) get information from companies that are not cooperating.

Twelfth Plan

The Union cabinet also approved the 12th Five Year Plan (2012-17) document aimed at achieving annual average economic growth rate of 8.2 per cent, down from 9 per cent envisaged earlier, in view of the slowdown in the global economy and poor growth and recovery.

“This is an ambitious plan. It estimates resources at an ambitious level and hopes to expand interventions in critical areas such as health and sanitation,” said Chidambaram.

The document has already been approved by the full Planning Commission headed by Prime Minister Manmohan Singh on September 15. The document will now be placed before the National Development Council (NDC), the apex decision making body, for final approval.

Besides other things, the 12th Plan seeks to achieve a 4 per cent agriculture growth during 2012-17. The growth target for the manufacturing sector has been pegged at 10 per cent.