The pension and banking sector reforms, along with increasing the FDI cap in the insurance sector, were the top reforms initiatives of the Manmohan Singh government. Since the banking sector reforms are unlikely to take place now with the UPA in its last leg, by introducing the insurance bill in Rajya Sabha, Manmohan Singh has ensured the new government that comes to power in May 2009 can make it a statute without a fresh Cabinet approval. Both Congress and BJP support the bill. Pension reforms are in a better state as reforms like getting fund managers to manage pension funds have begun without the need for parliamentary approval.
The stakes involved are significant. The sector had a turnover of Rs 26,287 crore in the quarter ended September 08. A simple calculation shows that raising the FDI limit to 49% may increase the total FDI just in the life insurance segment by almost 2.5 times from the current levels of about Rs 2500 crore, said TR Ramachandran, CEO, Aviva India.
But the All-India Insurance Employees Association, an umbrella body of the staff of public sector insurance firms, said they will observe a strike on Tuesday to protest the bills introduction.
Its debut in the Rajya Sabha too was marked by strong opposition that led to the Houses adjournment. There is hardly any reform in it. The sector has already been opened, former finance minister Yashwant Sinha told FE. With the global financial crisis hurting many insurance firms, this is hardly the time to bring in the legislation, he added. Government managers now expect the bill to be referred to the parliamentary standing committee on finance.
But companies are upbeat about the bill that proposes nearly 120 changes. The big advantage is it will give access to global capital. Life insurance is a capital-intensive industry and the hike in the FDI cap will definitely help, said Shikha Sharma, MD & CEO, ICICI Prudential Life Insurance Company Ltd.
Former RBI governor and economist C Rangarjan said, It is a step in the right direction and must be seen as a long-term measures, irrespective of the crisis. We need to facilitate investment and not worry about whether or when it will come in.
NS Kannan, executive director, ICICI Prudential Life Insurance, also said, Any reform in terms of increase in the foreign ownership limit for the insurance industry is directionally desirable. Given that life insurance is a capital-intensive industry, this move will help industry access larger international capital over a period of time. This FDI would be long-term foreign capital and not volatile money.
Finance Minister P Chidambaram in his budget speech in July 2004 had said the intention of the government was to raise the FDI cap in private insurance companies to 49%.
The bill was taken to the Cabinet on December 21, 2006 but following opposition from the Left parties, it was referred to a group of ministers headed by external affairs minister Pranab Mukherjee. It was finally revived in September this year following the exit of the Left parties from the UPA and was approved by the Cabinet in October.
To fast-track this reform agenda, UPA has split the original insurance billa money bill--into two separate legislations. Accordingly, the Life Insurance Corporation (Amendment) Bill, 2008, which proposes to hike the minimum capital of the state-run insurer to Rs 100 crore from the existing Rs 5 crore, was introduced separately in the Lok Sabha on Monday.