Insurance Bill retains proposal to raise FDI cap to 49%

Feb 23 2013, 08:55 IST
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SummaryDespite 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.

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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