Parliament Passes Bill To Increase FDI Ceiling Limit In Insurance Sector To 74% From 49%

The Bill to amend the Insurance Act, 1938 was passed by the Rajya Sabha las week.

As per the Statement of Object annexed to the Bill,

"In order to achieve the objective of Government's Foreign Direct Investment Policy of supplementing domestic long-term capital, technology and skills for the growth of the economy and the insurance sector, and thereby enhance insurance penetration and social protection, it has been decided to raise the limit of foreign investment in Indian insurance companies from the existing 49 per cent. to 74 per cent."

It may be noted that the foreign investment in insurance sector was first permitted in the year 2000 up to 26%. Subsequently, vide an Amendment Act of 2015, this limit was raised to 49% of the paid-up equity capital of such company, which is Indian owned and controlled.

The instant Bill removes such restrictions on ownership and control. However, such foreign investment may be subject to additional conditions as may be prescribed by the Central Government.

The Bill also proposes to omit explanation appended to Section 27(7) of the principal Act.

Presently, the Act requires insurers to hold a minimum investment in assets which would be sufficient to clear their insurance claim liabilities. If the insurer is incorporated or domiciled outside India, such assets must be held in India in a trust and vested with trustees who must be residents of India.

The explanation states that this will also apply to an insurer incorporated in India, in which at least: (i) 33% capital is owned by investors domiciled outside India, or (ii) 33% of the members of the governing body are domiciled outside India.

Parliamentary Debate

While introducing the Bill, Finance Minister Nirmala Sitharaman said that after holding extensive stakeholder consultation, it was found that the Insurance companies are facing severe liquidity stress and solvency related issues. She emphasized that it is necessary to raise FDI ceiling to stabilize the market by infusion of more funds.

She informed the House that in the past 5 years, since the FDI ceiling has been raised to 46%, there has been an inflow of Rs. 26,000 crore and total assets under the management of insurance companies has seen a 76% hike.

Supporting the Bill, MPs from Janta Dal (United) party and YSR Congress party expressed the need for inviting more investments in the insurance sector, given the growing needs and advancing lifestyle of the citizens. "People have changed their perception of insurance now. Earlier only life and vehicle insurance was sought; now people are moving towards comprehensive insurance plans," a Member said. It was emphasized that infusion of foreign funds will also speed up claim settlement and bring down the premium costs.

Speaking against the Bill, Congress MP Manish Tewari said,

"This bill has large and ominous implications in the times to come. This bill to raise FDI in insurance sector from 49% to 74% cannot be seen in isolation. It is part of a strategy for privatization of Banks and disinvestment in Public Sector Undertakings."

He recalled that India survived the 2008 World Economic crisis only because its banking and insurance sector was largely nationalised. He spoke against handing over of Indian domestic savings at the disposal of money-minting foreign companies.

Other issues raised during the debate:

• The present actual share of FDI in insurance sector is less than the current limit of 49%. Hence, there is no justification for increasing the limit to 74% when in 5 years, the target of 49% has not been achieved.
• The Bill does not contemplate a provision for preventing financially weak/ fraud foreign companies from entering the Indian insurance sector.
• Provision of the Bill allowing foreign ownership contemplates that the Government may prescribe certain safeguards. However, the provision is very vague and there is no specific mention as to what steps will be taken by the Government to ensure that money of common man is not misused.

Responding to the debate, Finance Minister assured the house that no company will be compelled to raise foreign investment. She stated that the proposed upper limit is not mandatory and there will not be an automatic increase in the stake of foreigners.

She also informed the House that the money deposited by Indian depositors can be invested by these foreign companies in India only and they will not be permitted to take this money outside the country.

On the issue of privatization, she emphasized that about half of market share of the Indian insurance sector is already held by private companies. She revealed, the public sector insurance market share is merely 38.78%, whereas private sector enjoys 48.03% of the market share.

The Bill will now be presented before the President for his assent.

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