NEW DELHI: The Cabinet today gave go-ahead to FDI cap hike in insurance to 49 percent with a rider that management control will remain in the hands of Indian promoters, thus paving way for inflow of as much as `25,000 crores foreign funds in the sector.
The approval to hike the FDI limit from the current 26 percent, a proposal which has been pending since 2008, is expected to attract long term capital, besides improving the overall investment climate.
This is the first major reform initiative by the Narendra Modi-led NDA government, and has raised expectations of further relaxation of FDI norms in sectors like defence and railways.
"The CCEA has approved raising of FDI cap in insurance sector to 49 percent from 26 percent," sources said, adding that all investment proposals beyond 26 percent will have to be approved by the FIPB and Indian promoters will continue to have the control of the management.
With the Cabinet approving the amendments to the long pending Insurance Laws (Amendment) Bill, it will now be taken up by Parliament.
According to KPMG, the higher cap could fetch investments up to `25,000 crores.
"Once there is proper clarity on the interpretation of control by Indian promoter, the additional foreign capital expected across life, health and general insurance companies is between `20,000 to 25,000 crores," KPMG (India) Partner Shashwat Sharma said.
After the Bill is passed by Parliament the same norms for foreign investment will apply to the pension sector as well.
"FDI in insurance sector will also strengthen the capital flows in the coming time... It would go a long way to rebuild investment sentiments in the country," PHD Chamber of Commerce & Industry president Sharad Jaipuria said.
There are about two dozen private sector insurance firms both in life and non-life segment.
Industry chamber Ficci said foreign players will enter insurance as well as the pension sector at this opportune time when the country is in need of foreign investments.
"This move should bring in the 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 life insurance industry," Max Life Insurance CEO & MD Rajesh Sud said.
In his Budget 2014-15 speech, Finance Minister Arun Jaitley had said that the insurance sector is investment starved and there is a need to increase the composite cap in the sector to 49 percent, with full Indian management and control, through the FIPB route.
The move would help insurance firms to get much needed capital from overseas partners.
The proposal to raise FDI cap has been pending since 2008 when the previous UPA government introduced the Insurance Laws (Amendment) Bill to hike foreign holding in insurance joint ventures to 49 per cent from the existing 26 percent.
However, the Bill could not be taken up in the Rajya Sabha because of opposition from several political parties, including the BJP.
The insurance sector was opened up for private sector in 2000 after the enactment of the Insurance Regulatory and Development Authority Act, 1999 (IRDA Act, 1999).
This Act permitted foreign shareholding in insurance companies to the extent of 26 percent with an aim to provide better insurance coverage and to augment the flow of long term resources for financing infrastructure.
The industry has been demanding for long that the FDI limit be raised so as to attract adequate funds for the expansion of the sector.