The decision was taken at a meeting of the Cabinet Committee on Economic Affairs. Sources said the government was hopeful the Bill would be passed in the current session of Parliament.
There is still a lot of time in the ongoing Parliament session. The Insurance Laws (Amendment) Bill will be taken up soon, a source close to the development said.
If the governments move goes through, it will end an over eight-year logjam in the sector where, despite repeated efforts, FDI has remained capped at 26 per cent.
According to the proposal approved by the CCEA, the insurance sector would have a composite FDI cap of 49 per cent. While FDI up to 26 per cent would be under the automatic route, companies would have to take approval from the Foreign Investment Promotion Board for more foreign investment.
Significantly, voting rights of the foreign partner has not been capped, although insurance firms will be under the management and control of the Indian partner. This would mean that the Indian partner would have the right to appoint a majority of directors, and be able to control management and policy decisions.
The issue on voting rights will have to go to Parliament. But we prefer a 49% cap without any riders, Finance Minister Arun Jaitley had said.
Officials indicated that the change in stance came just before the Union Budget. It was decided that not too many restrictions such as a cap on voting rights would be imposed on the foreign partner, but the interests of the Indian partner would also be protected, said a senior official.
Jaitley had announced the governments intent to liberalise the sector in the Budget, and the move is seen as a signal of the governments intent to encourage business and investments.
Insurers will now be able to raise much needed capital from foreign partners and expand the business. According to estimates, the raising of the cap could bring in as much as $ 6 billion in funds to the country.
It is heartening to see that the central government is acting quickly on policy decisions. Once approved by Parliament, this move should bring in much required long-term capital for the sector. It will also bring in domain capital which is of critical importance in this phase of growth of the life insurance industry, Rajesh Sud, CEO and Managing Director, Max Life Insurance, said.
Capital infusion in the insurance sector, through greater FDI, would ensure innovations on product design and distribution, better risk management, introducing superior technology and greater investments, said Chandrajit Bannerjee, CII director general.
However, some insurers remained cautious. We will wait until it is approved by Parliament. The Bill was taken up by the previous government too but could not be enacted, said an executive with a private insurance firm.
The proposal to raise the FDI cap has been pending since 2008, when the UPA government introduced the Insurance Laws (Amendment) Bill to raise foreign holding in insurance joint ventures to 49 per cent from the existing 26 per cent.
The Bill could not be taken up in Rajya Sabha because of opposition from several political parties, including the BJP.
The insurance sector was opened up for private players in 2000 after the enactment of the Insurance Regulatory and Development Authority (IRDA) Act, 1999.
Insurers welcome FDI hike; PwC sees inflow of Rs 1 lakh cr
(PTI) Private sector insurers welcomed the government move to increase foreign holdings to 49 per cent from the existing 26 per cent saying the move will benefit companies and customers and would help bring in new technology and better services.
Consultancy firm PwC said the move would see up to Rs 1 lakh crore in potential investment into the sector and take the country into the top league. Another consultancy firm Deloitte sees the move triggering selective consolidation since players with a strong capital base may have access to a war chest to acquire weaker players.
"It is heartening to see the new Insurance Bill being cleared by the Cabinet today. While one will await its passage by Parliament, there are other important provisions in the Bill over and above the capital structure that will benefit companies and therefore customers," ICICI Lombard General Insurance Managing Director and Chief Executive Bhargav Dasgupta said.
Earlier during the day, the Cabinet gave the go-ahead to hike FDI in insurance to 49 per cent with a rider that management control would remain with domestic promoters.
"Insurance penetration is abysmally low in our country and we need a lot of capital to reach out to the uninsured population. This move will facilitate insurers' entry into the hinterland in a major way," Reliance General Insurance Chief Exectutive Rakesh Jain said. He also said it would help bring in new technology and better servicing for customers.
Star Health and Allied Insurance Company Chairman and Managing Director V Jagganathan also welcomed the move saying the move would help insurers maintain solvency margin without any issues.
"Moreover, increasing FDI limit in different sectors will enable us to work better in a country like ours that is growing fast. This decision will help insurance business grow in small towns thereby increasing penetration," he said.
"We welcome the Cabinet's approval to increase FDI limit in insurance from 26 to 49 per cent with full Indian management and control, as it will help in attracting the much needed long term capital for the sector which can have multiplier effect on the state of economy, especially in meeting the huge infrastructure financing requirements," CII Director General Chandrajit Banerjee said.
PwC India's Anuraag Sunder said, "Potential investment in the sector could be anywhere in the range of Rs 80,000 crore to 1,00,000 crore. This may be just be the cure for pushing the country into the league of top tier markets, beyond the 12-year old 'emerging markets' category."
KPMG India partner Shashwat Sharma said the move would definitely evoke interest of global players both already present here as well as others planning an entry.
"Once there is proper clarity on the interpretation of control by local promoters, the additional foreign capital expected across life, health and general insurance companies is between Rs 20,000 to 25,000 crore," he said.
However, the peripheral industry including surveyors, distributors, and third-party administrators were apprehensive about the development.
"Foreign brokers have hardly added any value in the market so far but are strong with MNC balance sheet and attitude," an insurance distributor said on the condition of anonymity.
Deloitte India Senior Director Monish Shah said, that the move is likely to provide the much-needed growth capital for the industry.
"Access to capital may emerge as a competitive factor and companies that are able to attract and access such capital will be better positioned to consolidate their market share. It is also likely to trigger selective consolidation, as players with a strong capital base may have access to a war chest to acquire weaker players," Shah said.
He also said that at an industry level, increased capital is likely to have a positive impact on increasing penetration levels of insurance services, since the lean period that the industry underwent during the past few years had caused most players to trim down their operations and focus on cost efficiencies.