The Government of India has proposed a hike in the limit or cap on Foreign Direct Investment (FDI) in the insurance sector to 74% from the existing 49%. The decision was announced by the Finance Minister of India, Mrs Nirmala Sitharaman, during her budget speech in the parliament on 1st February 2021.
While presenting the Union Budget 2021, the Finance Minister said, "We propose to amend the Insurance Act, 1938 to increase the permissible limit from 49% to 74% in insurance companies and allow foreign ownership and control with safeguards". Further, she also stated that the Government would launch a new investor charter to protect the rights of all financial investors.
Welcoming the decision, the Confederation of Indian Industry wrote on its Twitter account, "This is bound to attract enhanced flow of capital into the sector, benefitting the economy."
What is Foreign Direct Investment (FDI)?
FDI refers to the investments made by an individual or a company, belonging to a particular country, into the business interests in any other country. In the year 2000, the insurance sector was first privatised in India, and the FDI limit was fixed at 26%. However, in 2012, the then Government proposed to increase this limit from 26% to 49%.
The decision by the Indian Government to hike FDI limit in the insurance sector was long-awaited. In fact, it was there on the Government's agenda since quite some time.
During her budget speech of 2019, the Finance Minister Mrs Nirmala Sitharaman had mentioned that her Government is planning to ease the FDI limit in the insurance sector.
The Insurance Regulatory and Development Authority of India (IRDAI) has also backed the decision to increase the FDI limit.
Why was the decision necessary?
Though an FDI of up to 49% was allowed in the Indian insurance market, not many foreign companies showed interest in investing. This was mainly because the government rules prevented them from taking control or ownership of the companies, which remained in the hands of their Indian partner.
This meant that any change in business strategies or board-level decisions would require the approval of Indian stakeholders in the company. However, foreign companies wanted equal or majority rights in the companies.
The decision to hike the FDI limit to 74% will allow foreign investors to become a major partner in the Indian insurance firms, and hence, it will help bring in the much-needed capital in the sector.
What will be the impact on the insurance industry?
Till now, the foreign investors were allowed to own only 49% of the insurance companies in India, with control and management resting in the hands of their Indian partners. However, with FDI limit increased to 74%, foreign investors will be able to own a major portion in these companies for the first time.
This is expected to help insurance companies in two ways – firstly, they will be able to raise working capital and reduce their solvency margin. Secondly, the penetration of their products will increase. This decision by the Government is also expected to help them in their bid to privatise public insurance companies. Let's learn how.
How has COVID-19 impacted the industry?
The Indian insurance companies suffered significant losses due to the COVID-19 pandemic. A sudden increase in the number of claims by their customers vastly impacted their key ratios and profit margins. As a result, most insurance companies in India recorded negative growth during the financial year 2020-21. In fact, many of them were left fighting the shortage of capital.
The Government's latest decision to increase the FDI limit will certainly help these companies raise working capital and nullify the effect of the pandemic on their economy. As per the experts, this move could bring in around Rs. 35,000 to Rs. 45,000* crores as foreign investment into the insurance industry of India.
Government's divestment programmeThe experts also see the Government's decision as a strategic move to strengthen the platform for its divestment programme. The Central Government has already expressed its desire to sell its stakes in public insurance firms, and an increased FDI limit could help them fetch better valuations from foreign investors.
To conclude
This Government's decision to raise the FDI limit in the insurance sector may provide a massive boost to the industry and pave the way for its unprecedented growth. Also, the Government would be able to attract higher bids from foreign investors for PSU banks and insurance firms.
* Source: https://www.outlookindia.com/newsscroll/govt-may-raise-fdi-cap-in-insurance-companies-to-74/1839351