The government has set the ball rolling for an increase in foreign direct investment limit in the insurance sector to 49 per cent from the current 26 per cent albeit with a rider that voting right of the overseas partner will be restricted at 26 per cent.
It has also proposed that majority of the company’s shareholders will have to be Indian nationals and foreign shareholders will have no say in the appointment of the CEO of the insurance company. While, the long-pending Insurance Laws Amendment Bill, 2008, proposes an increase in foreign holding in insurance joint ventures to 49 per cent from the existing 26 per cent with corresponding voting rights, the finance ministry, in a draft Cabinet note dated June 27, 2014, has proposed to include an official amendment to the existing Clause 3, Sub-clause (IV) to incorporate certain ‘safeguards/restrictions’ while enhancing the FDI cap.
The proposal to hike the FDI cap in the sector was first mooted by the previous UPA government. This has been pending in the Rajya Sabha since 2008.
“The voting rights of such foreign shareholders shall not exceed 26 per cent in the aggregate and the CEO of the said Indian insurance company, to be appointed by its Indian shareholders …. and the majority of the company’s directors shall be Indian nationals,” said the Cabinet note addressed to the law, corporate affairs and the commerce ministries along with the department of economic affairs.
The ministry has sought for the approval for proposed amendment, which, it feels has suitable safeguards on foreign equity investment in the Indian insurance sector.
“This is considered essential in light of the prevailing economic and insurance industry environment, and the sensitive nature of the subject of foreign equity investment,” the draft note said. The finance secretary had chaired a meeting attended by the general insurance council, life insurance council and representatives of various insurance companies, on May 31, 2014, soon after the new government was formed. While there was unanimity on raising the FDI limit to 49 per cent considering the capital needs of the companies, there were suggestions to impose safeguards.
“Participants were also skeptical about restricting the enhanced foreign investment limits to certain areas of the insurance sector, like general insurance, with or without stipulations for mandatory provision of certain services like health insurance,” the note added. However, this has not been accommodated in the final amendment proposed in the draft Cabinet note.