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Cabinet paves way for raising FDI limit in insurance sector to 74%

Raising the foreign investment limit in the insurance sector is expected to improve capital availability and foster competition in the sector.

Written by Sunny Verma , Sandeep Singh | New Delhi |
Updated: March 11, 2021 12:24:01 pm
fdi, fdi in insurance, fdi in insurance sector, budget, budget 2021, fdi, insurance, insurance sector, Nirmala sitharaman, business economy, foreign inflows, indian express newsFinance Minister Nirmala Sitharaman introduced the Insurance (Amendment) Bill, 2021 in Rajya Sabha. File)

IN LESS than six weeks since Finance Minister Nirmala Sitharaman announced major financial sector reforms in the Budget for 2021-22, the Union Cabinet has approved a proposal to amend the Insurance Act, 1938, paving the way for increasing the foreign direct investment (FDI) limit in the sector to 74 per cent from 49 per cent.

A Bill to amend the Act is likely to be introduced in the ongoing Budget session of Parliament itself, government sources told The Indian Express. Raising the foreign investment limit in the insurance sector is expected to improve capital availability and foster competition in the sector.

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The FDI limit hike will also develop the insurance industry as a big channel for generating durable funds for creation of long-term assets and aid the process of economic development as India emerges out of the pandemic.

Explained

Reflects resolve to push tough reforms

The decision reflects the government's resolve to push through decisions which have in the past met with political opposition. Greater foreign investment will allow insurance companies to introduce a broader range of products at affordable prices. This will help increase penetration, which is just 3.71% of the GDP.

“I propose to amend the Insurance Act, 1938, to increase the permissible FDI limit from 49% to 74% in Insurance Companies and allow foreign ownership and control with safeguards,” Sitharaman had said in her Budget speech on February 1. Under the new structure, the majority of directors on the Board and key management persons would be resident Indians, with at least 50 per cent of directors being independent directors, and specified percentage of profits being retained as general reserve.

The move is set to benefit the industry as it will help grow the market with a broader range of products at affordable prices. Insurance penetration currently stands at just 3.71 per cent of the GDP in the country. Higher investments will help increase penetration of products in an underserved market. It will also bring in global best practices, besides helping lower the cost of products due to greater competition.

Industry players said it would benefit small insurance players or the ones where the sponsors don’t have the ability of infusing more capital.

* the Budget, the government also announced that two public sector banks and one general insurance company will be privatised, and LIC will be listed on the stock exchanges in the financial year 2021-22.

The Cabinet’s move reflects the political resolve to push through decisions which have faced stiff opposition in the past. A Bill to raise FDI in the insurance sector to 49 per cent from 26 per cent was introduced by the UPA government in Parliament in 2008. However, it could not be passed due to opposition from Left parties and some others. The BJP-led NDA government had promulgated an Ordinance to give effect to higher FDI in the insurance sector in the first year after coming to power in May 2014.

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