In yet another big reform initiative aimed at bringing more capital into the insurance business, the government may soon open the sector to 74 per cent foreign direct investment (FDI) under the approval route to bring parity with the banking sector.
The proposed changes in the FDI limit for insurance is part of another round of overhaul of the FDI policy that the government is looking to implement to make the policy progressive and less restrictive. This has become important post Covid-19 outbreak.
Currently, FDI up to 49 per cent is permissible in insurance under the automatic route with the condition that insurance company's ownership and control remains at all times in the hands of resident Indian entities.
In banking, however, 74 per cent FDI is permitted with up to 49 per cent investment under automatic route while anything above that, under government approval route.
Sources said, like in banking, the government is now looking to raise FDI limit in insurance up to 74 per cent giving the control and management to the foreign investor. However, to ensure strong Indian presence in majority foreign owned and managed entity, the company may be mandated to appoint an Indian CEO.
The decision on changes in the FDI limit could be announced by the Department of Promotion of Industry and Internal Trade (DPIIT) soon. The Secretary, DPIIT Guruprasad Mohapatra, earlier told ISNS that there are always some policy considerations going on regarding several sectors, but refused to comment on specifics.
The increase in FDI limit insurance could pave the way for foreign players, who were getting jittery without having the control in their Indian investment, to now bring in more capital, new technologies, new products and ensure better market penetration. This will also ensure that long-term funds stay invested in India.
The government is looking to overhaul the FDI policy to make it transparent and less cumbersome putting most sectors under automatic approval route with 100 per cent FDI, leaving just a small list of items where overseas investment will either be barred or restricted with approvals done by the government on a case-to-case basis.
Last year the government relaxed foreign investment norms in sectors such as brand retail trading, coal mining and contract manufacturing. In the insurance sector, the government raised FDI limit in insurance intermediaries from 49 per cent to 100 per cent. There was speculation that similar changes may be done for insurance operations in this year's budget. But the government is looking at overhauling the FDI regime rather than focus on one sector.
For insurance, changes in FDI limit will require amendment to the Insurance Act to alter provisions pertaining to Indian ownership. Also, government will need to monitor the solvency of foreign firms so that the local business is unaffected by any challenges faced by the parent company and that they stick around to honour long-term contracts.
India has received nearly Rs 30,000 crore worth of FDI in the private sector insurance firms since 2015, when the government increased FDI limit from 26 per cent to 49 per cent. Another Rs 35,000 to Rs 40,000 crore could come if FDI limit is raised to 74 per cent, experts have said.