Union Budget 2021 is likely to present a proposal hiking the foreign direct investment (FDI) limit in the insurance sector to 74 percent from 49 percent now. However, sources told Moneycontrol that currently several Bharatiya Janata Party (BJP) leaders as well as leaders from its NDA allies are not fully convinced about the FDI hike.
Once the FDI hike is announced in Budget 2021, it would need ratification through a change in the Insurance Laws (Amendment) Act, 2015. Only after this proposal is passed through both houses of Parliament will the FDI be hiked.
“There is a feeling among certain leaders that 74 percent FDI will lead to Indian insurers losing the ‘Swadeshi’ tag. This is because foreign insurers may have a higher stake than their Indian counterparts,” said an official.
The bill to increase the insurance FDI limit from 26 percent to 49 percent in 2015 took seven years to be passed after stiff opposition. Even after it was finally passed in March 2015, the sector did not live up to the expectations of an increase in foreign investment inflows.
After the law was passed, several foreign players had hiked their stake in the Indian insurance ventures. They include Nippon Life (JV partner in Reliance Life Insurance), Tokio Marine (JV partner in Edelweiss Tokio Life) and Japan's Dai-ichi (JV partner in Star Union Dai-ichi Life with a 45.94 percent stake).
Among the recent deals is Belgian multinational insurer Ageas acquiring a 23 percent additional stake from IDBI Bank in IDBI Federal Life Insurance for Rs 460 crore. This bought Ageas’ stake in the insurer to 49 percent.
However, all this was nowhere close to the anticipated surge in FDI.
The FDI hike proposal
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.
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.
Sources said that the BJP’s allies have informally conveyed their displeasure with any further FDI hike stating that it will be “detrimental to the national interest”.
“One way to deal with the concerns is to ensure that the Indian management control clause stays in all joint ventures with foreign partners. This will enable the nationalist agenda to stay intact,” said another senior official.
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.
The government is looking to retain the ‘Indian management control’ clause now to ensure that strategic power stays with Indian partners even if FDI is at 74 percent.
Will foreign insurers be convinced?
Even when the 2015 FDI hike was announced, the ‘Indian management control’ clause was a bone of contention among foreign partners in insurance joint ventures. Under the 74 percent FDI hike proposal as well, this will be a roadblock.
Four large global insurers who are JV partners in Indian insurance companies said that it does not make business sense to bring in additional capital without any control.
“To hike their stake to 74 percent from 49 percent, foreign partners will bring in between Rs 600 crore to 800 crore of additional capital. How will it be beneficial to us if we don’t even get to take the final decisions in board matters” questioned the Asia Pacific region head of a global insurance company.
A senior vice-president for emerging markets (including India) at a multinational insurance firm concurred. “We have been in the insurance business for about 100 years and understand it well. Why should we make fresh investments if it doesn’t come with the power to take board decisions? Decisions will be taken in the best interests of India, because we are here for business,” he added.
At a time when the industry’s loss ratios are inching up amid the Covid pandemic and rising claims, as well as lower premiums due to lockdown and public transport restrictions, some middle ground will have to be found to get capital inflows into India’s insurance sector.