Cabinet nod: Insurance FDI hiked, health fund created

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March 11, 2021 6:30 AM

Higher FDI limit to help address insurers' capital constraints; eased norms to aid auction of mineral blocks

FDIIndia's Parliament last month passed the Insurance Amendment Bill 2021 to increase the foreign direct investment (FDI) limit in the insurance sector.

The Cabinet on Wednesday cleared amendments to the Insurance Act to pave the way for raising the foreign direct investment (FDI) limit up to 74% from 49%, as proposed in the Budget for FY22. The amendments will have to be ratified by Parliament to take effect.

It also approved the Pradhan Mantri Swasthya Suraksha Nidhi (PMSSN) as a single non-lapsable reserve fund created from the share of health in the health and education cess proceeds. This fund will be utilised for the health ministry’s flagship schemes, including Ayushman Bharat, National Health Mission and Pradhan Mantri Swasthya Suraksha Yojana.

The proposal to hike the FDI limit in insurance is expected to open up new avenues of funding at a time when some players are struggling with solvency issues. The move, along with the decision to launch the IPO of LIC and privatise one of the government-owned general insurers, would bring more efficiency to the market, analysts say.

Apart from drawing new foreign investors, the hike in FDI limit will also allow foreign partners, currently in joint ventures, to raise their stake and control the Indian insurance firms. Over a dozen insurance companies in India are formed of joint ventures between domestic and foreign partners, including ICICI Prudential, HDFC Standard Life, Bajaj Allianz and Star Union Daiichi Life Insurance.

Many of the existing domestic partners of private-sector insurance companies are unable to infuse fresh capital into their firms; higher FDI limit could help these firms to bolster their capital base and business.

Against the minimum regulatory requirement of 1.5 times, National Insurance’s solvency ratio languished at just 0.02 at the end of FY20, while United India’s hit 0.3 and Oriental Insurance’s 0.92. Thanks to initial infusion this fiscal, National’s solvency improved to 0.2 time at the end of September 2020 – still way below the requirement. United’s solvency rose a tad to 0.7 as of June 2020. Sensing the insurers’ urgent need, the Cabinet in July 2020 approved higher capital (Rs 9,950 crore) for this fiscal than the budgetary allocation of Rs 6,950 crore.

The move to raise the FDI limit will also help improve insurance penetration and herald consolidation in the sector, analysts have said. Domestic insurers would also gain from the sharing of best practices of risk management.

While presenting the Budget 2021-22, finance minister Nirmala Sitharaman had proposed to amend the Insurance Act, 1938, to increase the FDI limit in insurance companies and “allow foreign ownership and control with safeguards”.

Under the new structure (for building in safeguards), the majority of directors on the board and key management persons would have to be resident Indians, with at least half of directors being independent ones, and specified percentage of profits being retained as general reserve.

The life insurance sector in India was liberalised in 2000 after the government had allowed foreign companies to own up to 26% in domestic insurers. The sector was opened up further in 2014 when the FDI limit was hiked to 49%.

As for the Pradhan Mantri Swasthya Suraksha Nidhi, it will be a non-lapsable reserve fund for health in the Public Account. It can also be tapped to roll out various programmes under the National Health Mission and also for emergency and disaster preparedness.

In the Budget for 2018-19, the government had announced the replacement of a 3% education cess by a 4% health and education cess. Analysts had estimated a mop-up of Rs 11,000 crore a year more through this additional 1% cess.

Over 500 non-coal mineral blocks, partially or minimally explored under current leases, but are entangled in legacy issues and litigation, will be up for grabs. The Cabinet is learnt to have approved a supplementary proposal on mining reforms from the ministry of mines to allow transfer of letter of intent (LOI) handed out to a successful bidder to the acquirer of the bidder through the insolvency route.

Currently, the Minerals (Other than Atomic and Hydro Carbons Energy Mineral) Concession Rules, 2016, provides provision for transfer of mining lease or prospecting license-cum-mining lease granted through auction route. However, the rule is silent on transfer of LOI.

The Cabinet also gave its nod to the Minerals (Other than Atomic and Hydro Carbons Energy Minerals) Concession (Amendment) Rules, 2021, so that the lessee will still have to pay statutory dues equal to the minimum dispatch stipulated in a quarter even if dispatch falls short. In case, the lessee fails to maintain the minimum dispatch criteria for three consecutive quarters, “the state government may terminate such lease after giving a reasonable opportunity of being heard”.

The move comes in the backdrop of production and dispatch shortfall of important mineral such as iron ore in recent times which not only led to their price hike but also affected manufacturing of iron and steel in the country.

In January this year, the Cabinet had approved a proposal to amend the relevant law for their re-allocations through competitive bidding. Also, the employment-intensive, but highly under-invested sector, was given a fillip by doing away with end-use restrictions for miners. Those with captive leases will be allowed sell the minerals in the open market. The Cabinet also have the the go-ahead for reallocation of several non-producing blocks of the state-run companies, a move that could also enthuse the private players as many of these blocks have abundant proven resources.

The moves are in sync with the National Mineral Policy, which aims to increase the domestic production of non-coal, non-fuel minerals by 200% in seven years with greater private-sector participation.

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