Panel proposes a 49% limit with a tighter definition of ‘control’
Fourteen years after India permitted 26% foreign investment in the insurance sector and ending years of political wrangling over a proposal to enhance the limit, the under-performing industry seems poised to raise the much-needed growth capital. A parliamentary panel report, tabled in the Rajya Sabha on Wednesday, proposed a 49% composite cap — including foreign direct and portfolio investments — in the sector, with a tighter definition of “control” to strengthen the hands of Indian investors.
Though the Left parties and the Trinamool Congress continued to bicker, a larger consensus was indeed emerging among other major parties after a select committee on the Insurance Law (Amendment) Bill, 2008, produced its report after extensive deliberations.
The Cabinet approved the Bill later in the day.
The 15-member committee was set up in August after the Narendra Modi government failed to gather the requisite parliamentary support for the Bill, given its lack of majority in the Rajya Sabha. With the current breakthrough, the Bill is most likely to be passed in both Houses of Parliament in the current session. The government — looking at ways to revive investor sentiment by pushing difficult reforms — is likely to move the Bill for passage by the 245-member Upper House next week itself, sources said.
The select committee took note of concerns over FDI merely replacing domestic capital and said: “The committee is also of the view that incremental equity should ideally be used for expansion of capital base so as to strengthen the insurance sector.”
The capital requirement of the Indian insurance industry is estimated at $12 billion by 2020; the select panel noted needs of R55,000 crore over the next five years. Foreign capital of around $3 billion could be infused immediately after the investment cap is hiked, analysts said.
Most of the domestic insurance companies, including some that already have foreign partners, are keen to expand their capital base.
In some cases, of course, the foreign investor may merely be buying the equity that the domestic entities are looking to offload.
The hike in foreign investment limit in insurance will lead to a similar increase in the respective cap in the pension sector as the relevant law — the PFRDA Act — mandates that the foreign holding in pension sector will be the same as insurance. Higher FDI will also help insurance firms fetch better valuations in their initial public offerings. Expansion of the insurance industry would help catalyse savings into investments, rather than them getting locked up in relatively illiquid assets like gold.
Insurance stocks closed at 5.4% higher on Wednesday. Shares of Max India jumped 5.34%, Reliance Capital rose 4.34% and Aditya Birla Nuvo gained 0.71% on the BSE.
Foreign insurance companies having operations in the country through joint ventures with domestic firms include Netherlands-based Aegon, Canada’s Sun Life Financial, Italy’s Generali, Prudential and Nippon Life Insurance. All of them are believed to have expansion plans in the country and other are planning to enter.
Deepak Haria, senior director, Deloitte India, said: “If the Bill is passed by Parliament, it will help receive new funding and resources for existing players, and hopefully open up opportunities for new players into the Indian market. Many international firms have expressed interest in entering the market. Also, this will strengthen the long-term ambition for increasing financial inclusion in India.”
Life insurance penetration in India stood at a dismal 3.2% of gross domestic product (GDP) in terms of total premiums underwritten in a year, much lower than more than 10% in Japan and nearly 6% in Australia. Overall insurance penetration had declined to 3.96% of GDP in 2012 from 4.1% in 2011. Life insurance penetration had slipped from 3.4% in 2011, while non-life insurance penetration increased marginally from 0.7% in 2011 to 0.78% in 2012.
Ever since the insurance sector was opened up by the Atal Bihari Vajpayee-led NDA government in 2000, as many as 23 new life insurers and 24 general insurance have entered the sector.
The select committee said although the growth rates of various segments of the Indian insurance industry after foreign investment was allowed were below expectations, a hike in the foreign investment limit was indeed in order given the paucity of capital.
It recommended that the paid-up equity capital requirements be retained at Rs 100 crore so that health insurers have adequate capacity to provide critical services to citizens, adding that utmost priority should be accorded to this segment. Rejecting suggestions that paid-up equity capital in this segment be reduced to Rs 50 crore, it said such a move will encourage non-serious players to enter the field. It also recommended that the Insurance Regulatory and Development Authority frame adequate regulations to facilitate the entry of multinational insurance brokers who can provide an impetus to the country’s insurance and reinsurance sectors. Foreign insurance cap could, however, be kept at 26% for insurance cooperative societies, the committee said.
Irda in December 2011 stipulated that only life insurers that have completed 10 years of operations will be allowed to go public. The regulator also said that an insurance firm should have “embedded value” twice the paid-up equity capital.
As per current norms, “foreign investment by way of FDI, investment by FIIs/FPIs and NRIs” of up to 26% is permitted in the sector under the automatic route. In his 2014-15 Budget speech, finance minister Arun Jaitley had said the composite foreign investment cap of the insurance sector is proposed to be increased to 49% with full Indian management and control through the FIPB route.
Stating that whether FDI limit is 26% or 49% hardly alter “ownership” and “control”, the select committee said control must be defined in the Insurance Act itself, rather than under the FDI policy as at present. “The term ‘control’ shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholder agreements or voting agreements,” it said.
Insurance firms welcomed the select committee’s proposal on foreign investment.
“We already have 26% foreign capital from the Sanlam Group and once Parliament allows 49% foreign investment, we will increase it further,” Manoj Jain, CEO of Shriram Life Insurance, said. According to Rajesh Sud, CEO & managing director, Max Life Insurance, additional inflows of foreign capital will allow for greater investment in product and distribution and hence increased penetration of life insurance in the country. Echoing this view, Tarun Chugh, MD & CEO, PNB MetLife, said: “FDI not only brings in capital and foreign exchange immediately into the economy but also enables companies to invest further in managerial ability, technical knowledge, administrative organisation, and innovations in products and production techniques.”
Earlier in 2011, the standing committee headed by former finance minister Yashwant Sinha had rejected the proposal to hike FDI to 49% in the insurance sector, saying it may not have the desired effect and could expose the economy to global vulnerability.
Meanwhile, P Rajeev (CPI-M), KC Tyagi (JDU) and Ram Gopal Yadav (SP), in a dissent note to the report of the select committee on the insurance Bill, said: “The further hike in FDI may not be in the interest of the Indian insurance sector and the economy and against the interest of policyholders.” The members said they could not find any link between increasing FDI and increasing penetration of insurance.
Separately, TC member Derek O’Brien in his dissent note said, “An increase in FDI is neither necessary nor expedient. Therefore I strongly suggest that the limit for foreign investment in the insurance be retained at 26% and that the portfolio investment should be under no circumstances be permitted.”
Bill for billions
Dec 22, 2008: UPA introduces Bill in Rajya Sabha
Sep 14, 2009: Bill referred to standing committee
Dec 13, 2011: Panel opposes a hike in foreign investment cap to 49%
Oct 14, 2012: UPA okays certain amendments but fails to get Bill passed
Jul 25, 2014: NDA Cabinet approves certain amendments
Jul 30, 2014: Circulates amendments to the Bill
Aug 4, 2014: Government, Opposition discuss the Bill
Aug 14, 2014: Bill referred to Parliament select committee
Sep 9, 2014: Select panel invites public comments
Dec 8, 2014: Panel approves the Bill
Dec 10, 2014: Bill tabled in Rajya Sabha