Finance minister Nirmala Sitharaman on Thursday said a proposed hike in the foreign direct investment (FDI) limit in insurance to 74% from 49% will help insurers that are struggling with liquidity pressure boost solvency. As much as Rs 26,000-crore FDI has flowed into the growing insurance sector since 2015 after the cap was raised to 49% from 26%, she added.
The Rajya Sabha on Thursday cleared a Bill to amend the Insurance Act, 1938. Once ratified by the Lok Sabha, the Bill will pave the way for raising the foreign direct investment (FDI) limit in insurance up to 74%.
Replying to a debate in the upper House, Sitharaman said as many as 22 of 56 direct insurance companies in the country have received around 40% in FDI. THE average FDI in private insurance companies (excluding reinsurers) is about 31%, she added.
The proposal to hike the FDI limit in insurance is expected to open up new avenues of funding at a time when some players are struggling with solvency issues, analysts have said. The move, along with the decision to launch the IPO of LIC and privatise one of the government-owned general insurers, would bring more efficiency to the market.
Apart from drawing new foreign investors, the hike in the FDI limit will also allow foreign partners, currently in joint ventures, to raise their stake and control the Indian insurance firms. Close to two dozen insurance companies in India are formed of joint ventures between domestic and foreign partners, including ICICI Prudential, HDFC Standard Life, Bajaj Allianz and Star Union Daiichi Life Insurance.
Allaying fears of lawmakers on possible abuse of the legislation, the minister said adequate safeguards are built into the law. The majority of directors on the board and key management persons would have to be resident Indians, with at least half of directors being independent ones, and a specified percentage of profits being retained as a general reserve, Sitharaman said.
The life insurance sector in India was liberalised in 2,000 after the government had allowed foreign companies to own up to 26% of domestic insurers. The sector was opened up further in 2014 when the FDI limit was hiked to 49%.