India's reforms push hikes foreign equity cap in insurance

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SME Times News Bureau | 25 Jul, 2014
In a major push to reforms, India Thursday decided to hike the foreign equity cap in insurance to 49 percent, in a move that can potentially push the penetration of this social security net from under 5 percent at present.

The management control, however, will remain with Indian promoters once the relevant bill for the foreign equity hike is approved by parliament, officials said.

The Cabinet Committee on Economic Affairs (CCEA) chaired by Prime Minister Narendra Modi gave its nod to hike the foreign direct investment limit from the present 26 percent.

A senior government official who did not want to be named, said the overseas investments in the insurance sector would be allowed through the Foreign Investment Promotion Board (FIPB) route.

In the national budget presented earlier this month, Finance Minister Arun Jaitley had said the government will consider a hike in the overseas investment limit in the insurance business.

The move Thursday was widely welcomed even as insurance stocks of existing Indian entities rose in anticipation that more money will flow in.

The Confederation of Indian Industry (CII) said the higher foreign equity limit will help attract much needed long-term capital that can have a multiplier effect on the economy, especially in meeting the huge gap in infrastructure financing, estimated at $1 trillion over the next five years.

Capital infusion in the insurance sector, through greater foreign equity, would ensure innovations in product design and distribution, better risk management, introducing superior technology and greater investments, the chamber said.

CII said the end result will be sizeable improvement in the insurance penetration and density for the Indian economy which is considerably lower when compared with other emerging economies.

Amitabh Chaudhry, chairman, FICCI’s Insurance and Pensions Committee and managing director of HDFC Life Insurance, said the FDI cap increase will drive capital infusion in the insurance sector and revive growth.

“Given that the industry has witnessed muted growth in recent times, this move will further enable the industry to serve millions of under-insured Indians, improve life and health insurance coverage and provide long term savings vehicles,” Chaudhry said.

Shashwat Sharma, a partner at KPMG in India, said the move will evoke the interest of global players, both those present in India and those planning an imminent entry. “Once there is proper clarity on the interpretation of control by Indian promoter, the additional foreign capital expected across life, health and general insurance companies is between Rs.20,000 crore to Rs 25,000 crore.”

“Once approved by the Parliament this move should bring in the much required long-term capital for the sector,” said Rajesh Sud, chief executive officer and managing director of Max Life Insurance.

“It will also bring in domain capital which is of critical importance in this phase of growth of life insurance industry,” Sud said.