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49% FDI Cleared for Insurance Sector
Jul 27, 2014

The Union cabinet approved a proposal to ease foreign direct investment (FDI) limit in the domestic insurance sector to 49% from 26%, signalling the government’s intent to draw capital and investment into an economy that is struggling to claw out of a crippling slowdown. 

The move, however, comes with a rider that management control of these companies will remain with Indian promoters. The higher FDI ceiling will come into force after Parliament passes the Insurance Laws (Amendment) Bill that has been pending since 2008 for lack of political consensus. 

Overseas investment proposals beyond 26% will have to be approved by the Foreign Investment Promotion Board, the nodal agency that vets FDI applications.

Insurers need funds to maintain healthy capital base, offer a wider bouquet of products, protect consumer interests against insolvency and deepen insurance penetration in India.The insurance sector is investment-starved. Several segments need an expansion. India’s private insurance industry needs an estimated $6 billion (Rs 36,000 crore) of additional capital over the next five years.

Life insurance penetration, defined as the ratio of premium underwritten in a given year to the GDP,  is about 3.17% of GDP in India, lower than 10% in Japan and about 6% in Australia. Of the 24 life insurance companies in India, only 17 reported profits in the last fiscal.

A higher FDI cap in the insurance sector will also automatically ease FDI norms in the pension sector. The Pension Funds Regulatory Development Authority Act, enacted last year, stipulates that foreign investment ceiling in the pension sector should be identical to the insurance sector.

The rising costs of hospitalization demonstrate the need for increasing insurance penetration in India, for which companies need additional capital. Once approved by Parliament, this move should bring in much required long-term capital for the sector. It will also bring in domain capital, which is of critical importance in this phase of growth of the life insurance industry.


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