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INDIA BUSINESS WORLD - NOVEMBER 1st – NOVEMBER 15th 2008
CABINET OKAYS BILL TO RAISE FDI IN INSURANCE TO 49%
AFTER many years of debate, the government has decided to increase the foreign direct investment (FDI) limit in insurance companies from 26% to 49%. A bill to effect this change will be introduced in Parliament. The government, however, conceded that the bill may not be passed by the present House for want of time.
Finance minister P Chidambaram announced that the Cabinet decided that the government would introduce a comprehensive amendment bill. "The Union Cabinet gave its approval for introduction of the Insurance (Amendment) Bill, 2008 for amendment to Insurance Act 1938, General Insurance Business (Nationalisation) Act, 1972, and Insurance Regulatory and Development Act, 1999, in the Rajya Sabha on the basis of recommendations made by the Group of Ministers," Mr Chidambaram told reporters. The bill is being introduced in the Rajya Sabha as it is not a money bill—not involving expenses on account of the government.
The Cabinet also approved the introduction of the Life Insurance Corporation (Amendment) bill in the Lok Sabha. The bill, after its passage, will allow an increase in the insurance major's equity base from the current Rs 5 crore to Rs 100 crore. Currently, insurers have to maintain a minimum paid-up capital of Rs 100 crore as per the IRDA Act, with the sole exception of LIC as it is covered by a separate Act.
This amendment has been taken out from the comprehensive amendment bill the government moved in the Rajya Sabha as its inclusion would have made the entire bill a money one. This would have caused the bill to lapse once this Lok Sabha's tenure ended. By introducing it in the Rajya Sabha, the Centre has ensured its longevity.
Mr Chidambaram said the bill was unlikely to be passed by this Parliament, mainly due to lack of time, as it will go to a parliamentary committee. Parliament, which is having a recess now, will reconvene on December 10. The proposed changes in the ownership rules would not apply to state-run insurers where the government is the sole owner.
Through the changes, the government is seeking to "remove archaic and redundant provisions in the legislation", which it hopes would provide more flexibility to IRDA to function effectively. The move was cheered by all quarters, except the Left parties. IRDA chairman J Hari Narayans said: "If the insurance bill is passed, it will ensure the emergence of a more efficient insurance sector."
The insurance industry has been clamouring for the need to bring more capital in order to maintain the growth momentum. The capital need for these companies has, incidentally, increased recently due to the losses on unit-linked products. Presently, total FDI in the insurance sector is pegged at around Rs 2,500 crore. The industry expects another Rs 7,000 crore of FDI once the cap is raised, as many foreign players have shown interest in entering the sector. "A simple calculation shows that raising the FDI limit to 49% may increase the total FDI in the life insurance industry by almost 2.5 times from the current levels of approximately Rs 2,500 crore," said Aviva MD & CEO (designate) TR Ramachandran.
The country has 21 life and 20 general insurers. The joint ventures include Tata AIG, Bajaj Allianz, ICICI Prudential, HDFC Standard Life, Birla Sunlife, Max New York Life, Bharti AXA Life, IDBI Fortis, Aviva and Metlife India. "Insurance companies now require more capital to maintain the required solvency margin. Also, the industry is showing signals of slowdown. If, in such a scenario, adequate capital is not made available to the companies, things may get more difficult. The hike in FDI cap would also help customers with competitive products, more options and better service levels" MetLife India Insurance managing director Rajesh Relan said. After the bill's passage, IRDA would also get more power as regards fixing agents' commission, opening and closing of foreign offices by insurance companies and expenses being incurred by their management or board.
In 2005, Mr Chidambaram announced plans to amend laws and allow a higher FDI cap in insurance sector, but the plan met stiff opposition from the Left parties, then allies of the coalition government till they withdrew support in June. After winning the confidence vote in July, key policymakers had said they would hasten reforms in banking, insurance and pensions.
The insurance bill was referred to the Cabinet by a Group of Ministers only after the Left withdrew support to the Congress-led government on the Indo-US nuclear deal issue. The finance minister said these amendments reflected the industry's current needs.
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