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Budget 2021: FDI cap hike in insurance sector with conditional foreign ownership and control to boost M&A

Experts believe the announcement is a long-overdue measure and would help to infuse foreign capital into a long gestation sector like insurance

February 01, 2021 / 01:42 PM IST

Deal street has cheered Finance Minister Nirmala Sitharaman’s announcement in Budget 2021 to hike the FDI (foreign direct investment) cap in the domestic insurance sector from the existing 49 per cent limit to 74 per cent and expects the big-bang move to spur m&a activity and entry of global players. Leading deal makers believe firms based out of Japan and Korea may soon make a beeline for Indian assets.

The move will involve an amendment to the Insurance Act and allows foreign ownership and control subject to certain “safeguards”.

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“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 reserves,” the FM said in her speech..

“It's a welcome change that Indian control is no longer required which was a long-standing demand of the insurance sector. The move represents a good balance of all stakeholders and public interest,” feels Haigreve Khaitan, a senior partner at law firm Khaitan & Co.

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Others believe the announcement is a long-overdue measure and would help to infuse foreign capital into a long gestation sector like insurance.

“Sufficient protections can be built in especially via regulations (IRDA is a very strong regulator) as well as certain affirmative rights for the Indian partner,” says Uday Bhansali, President, Financial Advisory, Deloitte.

Experts agree that the move is in line with global practices in jurisdictions which have moved to liberalise the insurance sector.

“Apart from considerations like hope for fresh capital and new companies to increase penetration, this increase proposed on FDI with safeguards will bring India at par with most nations which welcome foreign participation in Insurance. Accordingly many items like the modernisation of accounting principles like IFRS17,  capital calculations based on risk, Solvency II measures and global best practices and investments have to be also introduced to keep pace with the world,” says Joydeep Roy, Global Health Insurance Practice Leader & India insurance Practice Leader.

Ashwath Rau, Senior Partner at AZB & Partners also welcomes the move and believes it will facilitate the growth of the insurance sector and result in significant FDI inflows.

“ The requirement of a majority of the board and KMP being Indian residents should not pose a challenge as this is in any event practically the case even in sectors where 100 per cent foreign ownership is permitted. One would have to see the percentage of profits required to be retained,” Rau elaborated.
Ashwin Mohan
first published: Feb 1, 2021 01:42 pm
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