Budget impact: Hopes of FDI hike in insurance high after FM hints at easing law

The murmurs of a further increase in the foreign direct investment (FDI) limit for the insurance sector have started getting louder with the Finance Minister’s indication that a further liberalisation of FDI policies is on the cards. In 2015, the insurance sector’s FDI limit was increased to 49 percent from 26 percent after the Insurance Laws (Amendment) Act was passed. In his Union Budget speech on Wednesday, Finance Minister Arun Jaitley said that a further liberalisation of FDI policy is under consideration and necessary announcements will be made in due course. Even after the FDI ceiling was increased, there were demands for it to be raised further. A cap of 74 percent similar to the FDI limit allowed in the private banking sector was also discussed. However, sources from the industry said that it was dropped at a preliminary stage since the ministry anticipated political backlash from other parties. “Now that the Finance Minister had talked about further relaxations in FDI limits, we are hoping that insurance also gets some benefits of it,” said a senior life insurance executive. However, he added that building a political consensus for this could be an issue. The Insurance Laws (Amendment) Act, 2015 was passed after discussions of almost 10 years. The main bone of contention was that foreign partners in insurance joint ventures should not be given a stronghold in taking all decisions related to the company. Hence, a provision of Indian management control was added into this Act, which said that at all times the Indian promoter of the insurance company would take the major business decisions related to strategy and appointments. Even the board was required to have a majority of members approved by Indian shareholders. Initially, the government had said that 26 percent FDI would be through automatic route and if it was to be increased to 49 percent, it had to be routed through the Foreign Investment Promotion Board (FIPB). Later, this too was also made automatic. Arun Jaitley in his Budget speech said that more than 90 percent of the total FDI inflows are now through the automatic route. He added that FIPB will be abolished in 2017-18. An increase of FDI in insurance sector to 49 percent was first mooted during the tenure of the former finance minister Pranab Mukherjee, but the decision to approve the proposal was deferred by the Cabinet. Despite severe opposition from parties like the Trinamool Congress, the Narendra Modi-led government passed the Act to increase FDI in the sector to 49 percent. However, several foreign partners have expressed displeasure about the fact that while they have significantly increased their investments in the Indian joint ventures, their shareholder rights have been curtailed. It is anticipated that the insurance industry has received about Rs 17,000 crore to Rs 18,000 crore as additional FDI inflow post liberalisation of FDI limits. The insurance industry is a capital-intensive sector and company officials believe a further liberalisation will give them a better room for growth.