Insurance Bill retains proposal to raise FDI cap to 49%

Despite a parliamentary standing committee’s firm stand against hiking the 26% foreign direct investment cap in insurance, the government has decided to approach Parliament with its original proposal to hike the limit to 49%, considering the sector’s huge capital needs.

Sources told FE that the Insurance Bill, listed for consideration and passing in the ongoing Budget session, proposes a composite foreign investment ceiling of 49%.

This means the government even negated a compromise formula that came up during informal discussions between the government and the Opposition to carve out a 23% window for equity holding by foreign institutional investors or overseas corporate bodies, while retaining the FDI cap at 26%. Of course, it remains to be seen if the government would be able to get the Bill passed, given that the BJP is unconvinced about the need to raise the FDI cap in insurance.

Finance ministry sources told FE that the composite cap of 49% foreign investment (including both FDI and FII components) was retained as the aim now is to get up to 49% FDI in the sector, which needs around $12 billion worth of capital by 2020.

The sector, which is burdened with losses, urgently needs long-term capital for expansion and increasing penetration, an official said.

We cannot afford any provision restricting FDI to less than 49%, especially when the Indian companies are finding it difficult to raise capital, the official said.

The compromise formula was considered following opposition from members of the parliamentary standing committee on finance, including its chairman and BJP leader Yashwant Sinha, against any move to increase FDI in the sector from the present limit of 26%. In an interview to FE later, Sinha indicated his willingness to discuss the 26% FDI plus 23% FDI formula.

What has reaffirmed the government’s conviction regarding its move to permit up to 49% FDI in the sector is the large number of representations it received from foreign investors and insurance companies requesting not to reduce the FDI limit from the proposed 49% in the Insurance Bill, the sources added.

These representations said lowering the FDI limit from 49% for a political compromise would complicate matters and adversely affect the ability of the sector to raise long-term foreign capital. The Insurance Regulatory and Development Authority also backed the move to allow 49% FDI.

Those who argue that FDI and FII should be separate have concerns over the possibility of a single foreign investor getting a 49% stake in an insurance company, and at the same time two or more Indian entities being in the minority by sharing the remaining 51%.

However, Gautam Mehra, executive director, PwC, said, If you give a 49% stake to foreign investors, they will be more comfortable and will get serious long-term investments.” Currently, even with 26% FDI, the foreign joint venture partners anyway have the ability to control the company through the power to appoint people to key positions such as the chief risk officer and the chief financial officer, he pointed out.

The advantage of the composite foreign investment cap over separate boxes for FDI and FII is the flexibility the former offers.

According to Securities and Exchange Board of India regulations, each FII cannot hold more than 10% equity in a company and their sub-account cannot own over 5% stake in a company, which in turn forces the need to bring in multiple investors if any insurance company opts for the complicated option of a higher FII component. Mehra added that if the intention is to raise long-term capital, most Indian companies would prefer long-term foreign investment, which is FDI.

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