Finance minister Nirmala Sitharaman said in her Union Budget 2021 speech that the foreign direct investment limit in the insurance sector will be hiked to 74 percent from 49 percent.
This will be after the Insurance Laws (Amendment) Act 2015 and Insurance Act 1938 are amended in the Parliament. When the insurance sector was privatised in 2000, the FDI limit was fixed at 26 percent, which was then raised to 49 percent in 2015.
She said that the majority of the directors in the board of these insurance companies will have to be resident Indians. This means that Indian management control will be retained in these companies.
“The FDI limit hike in insurance will allow foreign ownership and control with safeguards. Under the new structure, the majority of directors on the boards and key management persons will be resident Indians with atleast 50 percent directors as independent directors. A specified percentage of profit will be retained as general reserve," said the finance minister.
The FDI hike and impact
When the 49 percent insurance FDI limit was implemented in 2015, the ‘Indian management control’ clause was inserted into the Act. This clause said that all major board decisions, strategies and appointments could be done in Indian insurance companies only if a majority of the Indian shareholders give their nod.
Russell Gaitonde, Partner, Deloitte India said that the government’s decision to increase the FDI limit in the insurance sector from 49 percent to 74 percent is a welcome move as it was a long standing industry request and will help attract greater foreign investment and strengthen the insurance sector.
After the BJP government came into power in 2019, the first proposal was to increase the FDI cap in the insurance sector to 74 percent. This was to ensure that the insurance sector, which is currently capital starved, gets additional investment.
Vighnesh Shahane, MD & CEO, Ageas Federal Life said that insurance is a capital intensive business and post the pandemic, many Indian partners are not in a position to invest further capital in their companies.
"The FDI hike will give the foreign promoter an opportunity to buy out their cash-strapped Indian partners if required and provide the needed cash infusion," he added.
The insurance regulator stipulates minimum capital or solvency of 150 percent at all times. This is roughly the amount of assets that are required versus the liabilities.
Insurers who are close to the 150 percent limit either require look for external investors for sprucing up the solvency or fall back on the joint venture partners to seek additional funds.
Over and above the solvency requirement, insurers said that the FDI hike could be used to make investments in technology and digital sales.
Parimal Heda, Chief Investment Officer, Digit Insurance said that the FDI hike would not only increase the solvency position for some insurers who are very close to the 150 percent level, but would provide long term growth capital for other companies to invest in newer technologies.
"These technologies which would not only help in managing their losses but also in customer acquisition and thus increase insurance penetration. Further, the foreign partner would be more willing to transfer its technology once it becomes a major shareholder," added Heda.
However, what needs to be seen is how long this reform takes to be implemented. The earlier insurance reform hiking FDI limit to 49 percent took seven years to be approved by the Parliament.
Bhargav Dasgupta, MD & CEO of ICICI Lombard General Insurance said that the non-life insurance sector finally witnessed a long-standing demand being fulfilled in terms of increase in FDI limit to 74 percent. However, he added that what remains to be seen is the timely implementation of these measures.
Why was the FDI hike needed?
The increase in the FDI cap has been on the agenda of the government for quite some time now. Even the regulator, the Insurance Regulatory and Development Authority of India (IRDAI), has recommended that FDI in insurance be brought on par with the banking sector.
After the 2015 FDI hike, while the expectation was that the insurance sector would get fresh capital of Rs 25,000 crore, the actual infusion into the business was just around Rs 5,400 crore. The rest was local firms selling their stakes to foreign joint venture partners. Such stake sales did nothing to increase the capital position of the insurance companies.Follow Moneycontrol's Budget 2021 live coverage here.