The government on Friday proposed a 100 per cent foreign direct investment (FDI) in the insurance intermediaries — broking firms — from the current level of 49 per cent in the Budget. In another significant move, the government has decided to separate the National Pension System (NPS) — which has a corpus of over Rs 3 lakh crore — from pension regulator Pension Fund Regulatory and Development Authority (PFRDA) in order to address issues over conflict of interest.
Announcing the FDI hike in the Budget on Friday, Finance Minister Nirmala Sitharaman also said that the government was also looking into the possibility of hiking the FDI limit in the insurance companies from the current level of 49 per cent.
While the Finance Minister did not indicate the new cap that the government was considering, insurance sources said the FDI cap is likely to be increased to 74 per cent soon.
Sumit Rai, MD & CEO, Edelweiss Tokio Life Insurance, said the proposed 100 per cent FDI in insurance intermediaries will have a positive impact on customers, intermediaries and the sector. “Insurance distribution is an upfront-capital intensive business with a long gestation period, and given low insurance penetration in India, there is a significant need to strengthen existent distribution networks. The proposed 100 per cent FDI, coupled with a strong India growth story, will enable intermediaries to expand faster in non-urban markets, deepening insurance penetration in the country,” Rai said.
A section of the insurance sector is, however, adopting cautious approach. “When it comes to opening up of 100 per cent FDI in intermediation in insurance, we will have to wait and watch on how this develops further,” said Tapan Singhel, MD & CEO, Bajaj Allianz General Insurance. If the FDI in the entire sector is hiked to 74 per cent, there could be a big inflow of FDI as several foreign companies are keen to hike their stakes in their Indian joint ventures, said an insurance official.
On the pension regulator, the government said the matter of conflict of interest arises as PFRDA is the regulator of the pension sector in India and it also runs pension schemes such as NPS and APY (Atal Pension Yojana). “Keeping in view the wider interest of the subscribers and to maintain arm’s length relationship of the NPS Trust with PFRDA, steps will be taken to separate the NPS Trust from PFRDA with appropriate organisational structure,” Sitharaman said. PFRDA implements and regulates the NPS and Atal Pension Yojana through various intermediaries including, the NPS Trust.
The Budget has also proposed to make lump sum withdrawal of 60 per cent from NPS totally tax free at the time of maturity. A subscriber on maturity at the age of 60 would be able to withdraw up to 60 per cent of the corpus without paying any tax. The balance 40 per cent of the corpus would have to be compulsorily used to buy an annuity plan. The annuity received is taxable.
Sandip Shrikhande, CEO, Kotak Mahindra Pension Fund, said, “From a NPS point of view, the budget has proved to be a bit of a dampener. 14 per cent limit is applicable only to the Central government’s contributions to its employee’s account. Similarly, 80C exemption on Tier II contributions is available only to Central government employees. The good thing is that the withdrawal is now completely tax-free.”