According to sources, despite the finance ministry pitching hard for it, the Parliaments standing committee on finance, headed by BJP leader and former finance minister Yashwant Sinha, has refused to buy the proposal to raise FDI cap in the Insurance Laws (Amendment) Bill, 2008.
The standing committees views are not binding on the government, but given the acrimonious political situation, the government is unlikely to overrule the committee at this juncture.
A hike would have bolstered the capital base of insurance firms, besides helping them fetch better valuations in their IPOs.
Last week, the Insurance Regulatory and Development Authority issued IPO norms for life insurers, permitting only those with 10 years of operations to go public. HDFC Standard Life Insurance, ICICI Prudential Life Insurance and Reliance Life Insurance have evinced interest in tapping the market, although none of them have finalised plans as yet.
Except LIC and Sahara, all insurance companies have foreign partners. Reliance Life Insurance recently inducted Nippon Life of Japan as an equity partner.
Global insurers like New York Life and Prudential Financial have been lobbying hard for a higher FDI limit. According to an estimate, FDI in life insurance will rise almost 2.5 times from the current Rs 2,500 crore, if FDI cap is raised to 49%.
Sources said in the report adopted Thursday, the standing committee has clearly rejected the proposal to raise FDI limit in insurance companies. The finance ministry made several presentations (in favour of the hike), but we remained unconvinced, said a committee member. The committee reckoned that insurance companies which handle the savings of Indian people would do well not to allow foreign players to hold higher stakes.
Calling the panel's views illogical, SB Mathur, secretary general of Life Insurance Council, a lobby group comprising 24 life insurers, said: When the sector was opened up, there was an understanding that 49% FDI would be allowed. That was the basis on which the foreign partners had invested.
The committee also proposed a separate definition for health insurance in the Bill and a hike in the mandatory minimum capital base for health insurance from Rs 50 crore to Rs 100 crore, on par with other insurance segments. We have asked for a definition of the health sector and an expansion of the number of ailments, treatments and procedures which can be covered under health insurance. The committee has also asked for insurance for domestic as well as international travel, said the member.
The insurance industry has pumped in roughly Rs 32,000 crore into the sector over the years.
The Bill also allows for nationalised general insurance companies to raise funds from capital markets. The life insurance industry collected Rs 49,064 crore premium in the first six months of 2011-12, while the non-life insurance industry gathered a total premium of Rs 28,604 crore during April-September 2011-12. State-owned LIC held a market share of around 76% in terms of new business premium for the fiscal year up to August 2011.
Sources said the parliamentary panel has also proposed removal of the exemption from IRDA registration for foreign body corporates (other than private companies) to do the business of insuring properties within special economic zones (SEZs) .
The panel's report on the insurance Bill is yet another piece of bad news for the embattled government. Finance minister Pranab Mukherjee had reached out to the committee on several times to cooperate on second-generation reforms and related legislative business, but the committee wasfirm on its views.