Insurance, coal reforms take ordinance route

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New Delhi | Published: December 25, 2014 2:14:50 AM

Showing firm resolve to pursue its reform agenda despite heavy political odds, the Narendra Modi government...

The ministry expects to conclude the e-auction for the first tranche by mid February. ReutersThe ministry expects to conclude the e-auction for the first tranche by mid February. Reuters

Showing firm resolve to pursue its reform agenda despite heavy political odds, the Narendra Modi government on Wednesday approved the promulgation of an ordinance to usher in long-stalled reforms in the insurance sector and reissue the coal ordinance for time-bound reallocation of the captive coal blocks cancelled by the Supreme Court.

Lamenting the Opposition’s obstructionist stance in Parliament, finance minister Arun Jaitley hinted at the government’s intent to convene a joint session of Parliament to raise the foreign investment limit in insurance companies to 49% from the current 26% if Parliament fails to pass the Insurance Laws (Amendment) Bill, 2013, even in the Budget session.

The Modi government, which accepted all the recommendations of the House’s select panel on the insurance Bill, hanging fire since 2008, could not introduce it in the 245-member Upper House. Neither could it get the relevant Bill on coal passed by the Rajya Sabha, although the Lower House, where it has a majority, cleared it.

Issues like religious conversion had disrupted Parliament, especially in the Rajya Sabha, where the ruling alliance’s strength is just over a quarter, in the last few days of the winter session that concluded on December 23.

“Stalemate and obstructionism in one House of Parliament cannot go on in perpetuity. There is a Constitutional remedy,” Jaitley said, hinting at the possibility of a joint session of Parliament. Raising the foreign investment limit is expected to generate inflows of $6-8 billion in the insurance sector that is looking for growth capital.

Jaitley said the standing committee had recommended for the Bill’s adoption but it was not allowed to be taken up in the Upper House. “The government has recommended to the President promulgation of the Insurance Laws Amendment Ordinance which incorporates the select panel’s recommendations verbatim,” he said.

Coal secretary Anil Swarup said the e-auction process for allocating 42 coal blocks to the private companies will get under way on Thursday as the registration for the bidding process will commence. He said industry doesn’t have to worry about the relevant law not getting passed, as whatever actions undertaken under the ordinance would remain valid even after it expires. The coal ministry will release tender documents for the 42 blocks — of which 23 will be earmarked for the power sector and 17 for unregulated sectors (cement, sponge iron, coal washeries) — on December 27.

One coal block would be reserved for the steel sector while one more block is awaiting forest clearance. The ministry expects to conclude the e-auction for the first tranche by mid February.

A total of 101 blocks will be reallocated in the first phase (including the above 42 in the first tranche) by March 31, 2015. While 65 will be auctioned off, 36 will be allocated to central and state PSUs on a nomination basis.

The Cabinet also cleared the auction methodology to be employed in the e-auction. As reported by FE earlier, the auction for the unregulated sector will be based on forward bidding with a minimum floor price of Rs 150 per tonne while reverse auction methodology will be used for the regulated (power sector) with a reserve price of Rs 100 per tonne.

As per the methodology, bidders will have to pay 10% of the respective blocks’ “intrinsic value” immediately after they win the bids. The successful bidder will then pay the intrinsic value minus the upfront payment in annualised instalments on a rupees per tonne basis. The intrinsic value of each block will be determined by the government by computing its net present value based on the discounted cash flow approach and any discount over and above this will be adjusted in the NPV itself.

As per current norms, “foreign investment by way of FDI, investment by FIIs/FPIs and NRIs” of up to 26% is permitted in the insurance sector under the automatic route. The select committee, which felt that foreign capital limit either at 26% or at 49% does not alter “ownership” and “control”, recommended that the term “control’’ must be defined in the Insurance Act itself to strengthen the hands of domestic investors, rather than under the FDI policy as at present. It recommended a composite cap for foreign investment, including FDI and portfolio investments.

The capital requirement of the Indian insurance industry is estimated at $12 billion by 2020. According to the House panel, domestic insurance sector needs Rs 55,000 crore over the next five years. 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 of the UK and Nippon Life Insurance. All of them are believed to have expansion plans in the country and others are planning to set up shop.

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