Cover all insurers from Day 1 of new FDI cap, says DFS

Written by Arun S | New Delhi | Updated: Jun 18 2014, 14:16pm hrs
FDIIt is estimated that the average capital required by the life insurance industry is around 4-5 times that of non-life.
The department of financial services (DFS), in its suggestion to finance minister Arun Jaitley, said the proposed hike in foreign investment in insurance from 26% to 49% should cover life, health and non-life segments from the very beginning and be devoid of any riders.

Only such a wholehearted approach would bring the desired dividends by attracting long-term capital and the latest technology from serious overseas investors, the department said.

The finance ministry has been considering a proposal to increase the foreign investment level in the sector to 49% but with a condition that voting rights of foreigners will remain restricted at 26%. Another proposal was to first ease the cap to 49% only in the non-life insurance segment, then extend it to health and finally to life insurance.

Though the DFS is keen that the provision to hike the foreign investment to 49% is not compromised, a final decision by the minister will take into consideration the political ramifications of such a move, officials involved in the discussions told FE.

The DFS has also sought the tabling of the Insurance Laws (Amendment) Bill as it is in Parliament in the Budget session itself. The Bill, among other things, seeks to raise the foreign investment cap.

Foreign investors, citing the young population and the low penetration, are more keen on life insurance as they see a greater opportunity there compared to non-life. It is learnt that investors were also not enthusiastic to commit huge long-term capital in the sector without the proportionate voting rights as it will be difficult for them take major decisions with just 26% voting rights if their Indian joint venture partner is holding a 74% voting rights stake.

The industry believes that any increase in foreign investment should be coupled with a commensurate increase in voting rights, Anish Thacker, partner (tax and regulatory services), EY. He added that the life insurance business needs more foreign capital as it is usually more capital intensive and takes longer to break even than the non-life business.

Prashant Tripathy, senior director and CFO, Max Life Insurance, said that allowing 49% foreign investment will have a snowballing effect of more capital to other sectors when Indian shareholders decide to sell their stake and bring it down to 51% from 74%.

It is estimated that the average capital required by the life insurance industry is around 4-5 times that of non-life. Also, while it takes only around 3-5 years for investments to break-even in the non-life segment, in the life insurance business the same requires around a decade.

The UPA government had tried to get the Bill passed by Parliament, but the BJP, mainly its senior leader and former finance minister Yashwant Sinha had opposed the move. The parliamentary standing committee on finance headed by Sinha had recommended that the foreign equity ceiling be retained at 26%. However, later, just before the general elections, top BJP leaders had indicated that the party may consider a higher ceiling if it comes to power, adding that their concerns on foreign investment was mainly regarding the retail sector.

The RBI recently said that "effective from February 4, foreign investment by way of FDI, investment by FIIs/FPIs and NRIs up to 26% under automatic route shall be permitted in insurance sector. The country's insurance sector needs capital of around $12 billion up to 2020. Increasing the foreign investment cap to 49% is expected to lead to foreign investment of around $3 billion immediately, most of it in life insurance sector.