Government and Insurance Reforms

Intro: People are looking for commitment of Modi Government to the reforms process of Insurance Laws (Amendment) Bill, 2008.
The BJP government led by Narendra Modi has hit the ground running. In its first two months in the office it has taken a number of small steps whose cumulative effects would be felt in the times to come. These steps were generally too small or mundane for the people or the media to be noticed. People looking for the commitment of the present government to the reforms process have therefore fixated their attention to the Insurance Laws (Amendment) Bill 2008 and this has already generated a lot of headlines.
One of the most significant aspects of the Bill is to increase the Foreign Direct Investment (FDI) limit to 49% in the Insurance companies. Some of the other provisions are the change in the Act providing for a mandatory reduction in the stake of Indian partner after 10 years, appointment of Securities Appellate Tribunal (SAT) as the appellate tribunal, regulation of agents and their commission etc.
Congress in its trademark U-turn has decided not to back the policy to increase the FDI limit. The Bill that was championed by the Congress party while in Government is virtually a disowned child now. This does not come as a surprise to people who have followed the UPA’s tenure closely. There was a disconnect between the Government and the party then and this continues to persist with the people then in the government still supporting the Bill and others who want to delay or scuttle it. Needless to say that those opposed to the Bill in the party are more powerful. The demand to send the Bill to a Select Committee is nothing but a sinister ploy to delay the passage of the bill. Their objections to the Bill are vague and inconsistent so much so that the finance minister has asked Congress to either spell them out clearly or else oppose the Bill in totality. His offer to take into account the concerns of opposition parties and members has not managed to break the deadlock. Congress is perhaps motivated by a cynical calculation that the failure of the government to get this bill passed soon would puncture the high hopes for economic reforms that the accession of the current government generated internationally.
Media in its attempt to show a volte-face by the BJP has conveniently chosen to ignore certain important facts. While in opposition the party had always maintained that it was open to supporting the Bill provided its concerns were taken on board. Shri YashwantSinha, however vocal in his opposition to increasing the FDI limit to 49%, spoke as the chairmain of the Standing Committee on Finance, sixteen out of thirty (a majority) members of which belonged to the UPA, and not as a BJP spokesperson on the issue. The Standing Committee was also livid at the fact that ‘Statement of Objects and Reasons’ of the Amendment Bill was to give an impression that the proposal to hike the FDI limit to 49% was based on the recommendation of expert committees which was not the case.
Coming to the merits of the debate, if any, one can safely say that the reasons for hiking the FDI limit in Insurance companies to 49% apply with a greater force today than in the year 2008. There can be no doubt that insurance is a capital intensive business. Indian insurance companies have been devouring capital with the chances of profitability being remote in the near future. For every single rupee brought in by a foreign partner, the Indian company needs to contribute roughly Rs. three. In order to further increase the Insurance cover the companies need to inject in more capital but the law for Indian promoters to contribute 74% of the capital is proving to be too onerous, particularly at a time when their balance sheets are already stretched thanks to a slowdown in economic activity reasons for which can be traced back to the UPA government.
Insurance Regulatory Development Authority (IRDA) in its submission to the Standing Committee had strongly argued for an increase in the FDI limit to 49% highlighting the fact that there were 13 bank promoted insurance companies in the Life and General Insurance space and with the introduction of Basel III requirements, the promoter banks would need to provide extra capital for their core banking activities. Further as per RBI norms a bank can invest upto 20% of its networth in an insurance company making it difficult for them to infuse further capital in the insurance companies promoted by them. Now add to this the progressively worsening balance sheet of banks and the government’s refusal to capitalise them and we get a really grim picture. To expect such banks to be able and willing to infuse capital in their Insurance companies would be ignoring the reality.
The alternative means to arrange capital are fraught with problems of their own. Approaching the primary market through Initial Public Offering (IPOs) can be one option but despite the recent highs, share markets are still not out of the woods. The volumes are low and the retail investor is still on the waiting mode. In such a scenario the appetite for Insurance shares is expected to be low, adversely affecting its valuation, especially because the industry is not making profits. A deluge of IPOs from the Insurance sector would further depress the valuation. The companies should be allowed to have the freedom to approach the primary market as and when they see it fit. Any dispassionate analysis of the Bill and the attending circumstances would make it clear that the amendment is designed to ease the capital constraints of the Insurance companies than a dogmatic adherence to increase the FDI limit.
Being the first major item on the legislative agenda of the new government, stakes are actually quite high. There have been reports in the media that the government might call a joint session of the Parliament and use its brute majority in the Lok Sabha to get the bill passed. This would show to the world government’s commitment to reforms and make it amply clear to the Congress and other opposition parties the government cannot be held ransom to their whims and fancies; it has to be weighed against the possibility of antagonizing the Opposition parties and also the unhealthy precedent it might set for the future.
Insurance Laws (Amendment) Bill 2008 should be seen as the first of a serious of major steps to make the necessary policy level changes and revive the economy. The mind boggling investment figures projected under the current 12th Five Year Plan will not materialize until and unless we reform our financial markets rapidly.
The government will not only have to deal with vested interests in the current set-up but also with the Opposition parties, most notably Congress, which are hell-bent on
scoring political brownie points at the cost of the country and its 1.2 billion people.
Gopal Krishna Agarwal(The writer is the Member of BJP  National Executive, Alternate President, Association of National Exchanges Members of India (ANMI))