Insurance:Insurance of Economy through FDI
Intro: Once FIPB gives green signal, Indian promoters will have management control and if passed by the Parliament, same 49% FDI will also apply in pension.
The Union Cabinet of the newly formed NDA government in its first major move to boost foreign capital inflows has approved Foreign Direct Investment (FDI) in the insurance sector to 49 per cent.
However, 49 per cent FDI will be allowed only in cases where management control remains with Indian promoters. Also, it will be allowed only through the approval route, which means, the Foreign Investment Promotion Board (FIPB) must give the green signal. FDI up to 26 per cent, however, will be allowed through the automatic route, requiring no FIPB approval and without riders such as differential voting rights or restriction of voting rights for investors.
49 per cent of FDI will affect the public companies in insurance sector but, it will give a rise to the economy which will ultimately help the Indian economy to rise.
This move of greater FDI would ensure innovations in introduction of superior technology and higher investments. The end result will have strong penetration in India, which is now considerably lower than in other emerging countries.
The 49 per cent FDI means foreign capital can flow in either, as direct investment or via the portfolio route, or as a combination of both. Direct investment refers to foreign investors buying equity directly from an Indian company and then becoming part of the board of directors or the management.
As per Securities and Exchange Board of India (SEBI) rules, portfolio investment cannot be more than 24 per cent in a listed company. However, this can be raised up to the limit set for the sector after getting shareholder’s approval.
Once change in FDI for Insurance Sector is approved by the Parliament, it will have direct impact on the Pension Sector. Since Pension Act clearly states that FDI limit would be at par with the Insurance Sector. This means FDI in pension will also be 49 per cent.
Pending since 2008
The Bill has been pending in the Rajya Sabha since 2008. But, with the Cabinet approval in the amendments, the Insurance Laws (Amendment) Bill will now be taken up by the Parliament, possibly in the ongoing session. The erstwhile United Progressive Alliance (UPA) Government had decided to hike the FDI cap in insurance, but could not get the amendments approved in the Parliament. At present, there are 23 private sector companies in life insurance and 22 in general (health, motor, travel, etc) insurance in the country.