The Telegraph
Friday , July 25 , 2014
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Insurance prop laced with riders

New Delhi/Mumbai, July 24: The Union cabinet today cleared a bill to increase the FDI limit in insurance to 49 per cent from 26 per cent with riders that the management and control of these firms will remain with Indian promoters.

However, it is unclear whether the Modi government has capped the voting rights of foreign investors at 26 per cent to win over critics and help in the passage of the bill in Parliament.

Sources said the draft cabinet note had mentioned the cap but this was opposed by certain sections of the cabinet.

Officials had earlier indicated that the government would limit the voting rights of overseas partners to 26 per cent even if the partner had a 49 per cent shareholding and would not allow foreign shareholders to have any say in the appointment of the CEO.

There would also be a clause in the bill requiring the majority of the company’s directors to be Indian nationals.

“The cap on voting rights, if placed, would not be surprising as the industry has already factored in this. The foreign investor would have to weigh the option of participating in the hugely untapped insurance market when an opportunity to enter arises or wait till they have complete say in the management,” Monish Shah, senior director of Deloitte, said.

Under the new rules, approval of the Foreign Investment Promotion Board (FIPB) will be necessary only for investment beyond 26 per cent.

The government is expected to introduce the amendments to the bill in the current session of Parliament, which gets over by the middle of August.

The BJP had opposed any move to raise the cap in the insurance sector earlier. A parliamentary panel headed by senior BJP leader Yashwant Sinha had said that allowing a greater role to foreign capital in the insurance sector would not necessarily have the desired impact.

Welcoming the move, IRDA (Insurance Regulatory and Development Authority) chairman T.S. Vijayan today expressed the hope that the move would finally enable companies to enter capital markets. “Now I expect insurance companies to get listed,” Vijayan said.

Analysts feel the higher cap will fetch long-term investments for the sector.

“The additional foreign capital expected across life, health and general insurance companies is between Rs 20,000 crore and Rs 25,000 crore,” KPMG (India) partner Shashwat Sharma said.

“Potential investments in insurance could be anywhere in the range of Rs 80,000-100,000 crore,” said Anuraag Sunder, insurance expert with PwC India.

After the bill is passed by Parliament, the same norms for foreign investment will apply to the pension sector as well.

“The move should bring in the much required long-term capital for the sector. It will also bring in domain capital which is of critical importance in this phase of growth of the industry,” Rajesh Sud, CEO & MD, Max Life Insurance said.

Amitabh Chaudhry, chairman of Ficci’s Insurance and Pensions Committee, said, “The industry has witnessed muted growth in recent times, this move will enable the industry to improve life and health insurance coverage.”

Sunil Sharma of Kotak Mahindra Old Mutual Life Insurance said the FDI hike will lead to 25-30 insurers entering the market.

“We believe that FDI is critical for long-term growth of insurance and will also serve important economic objectives for the nation. With an increase in the FDI limit, insurance companies expect to not only get the capital but also technical and product expertise of their foreign partners,” Reliance Life Insurance CEO Anup Rau said.

Incidentally, Nippon Life Insurance holds a 26 per cent stake in Reliance Life and many expect the Japanese giant to increase its shareholding in the venture.

The stock markets were also anticipating such a move. On the BSE, shares of Reliance Capital ended with gains of over 4 per cent at Rs 613.95. Shares of Max India also ended in the green on the news.

There are about two dozen private insurance companies both in the life and non-life segments.

The insurance sector was opened up to the private sector in 2000 after the enactment of the Insurance Regulatory and Development Authority Act, 1999.

Since then the number of players in the insurance sector have gone up from seven to 53 as on March 31, 2014. They operate in the life, non-life, and re-insurance segments.

Insurance penetration in India is very low. Only about 6 per cent of the population have a cover; of these, about 4.4 per cent have life insurance and 5 per cent have a reasonable health cover. Most small businesses (family-owned) have no or negligible insurance.