Seven years after the UPA government first tried to enhance the foreign holding in insurance to 49%, Parliament on Thursday passed the Insurance Bill that raises the cap from 26% to 49%. This will potentially trigger a flow of growth capital to the industry and give room for foreign insurers to expand in India.
The development could also prompt many domestic insurers to revisit their long-stalled IPO plans and the combined effect of all this, experts said, would be a significant improvement in insurance penetration in India, a dismal 4% at present.
The Narendra Modi government’s first big legislative success in the financial sector came as the Rajya Sabha passed the Insurance Laws (Amendments) Bill, 2015, by a voice vote after the Congress lent its crucial support.
Minister of state for finance Jayant Sinha said the higher cap would help Indian insurers expand their services and boost infrastructure funding.
While the capital requirement of the industry estimated at a huge $12 billion by 2020, analysts said the Bill’s passage could see foreign capital infusion of R20,000-25,000 crore across life, health and general insurance firms in two to three years.
Even with the enhanced foreign investment, the control of domestic insurance companies will remain with the Indian management. A hike in insurance FDI will also a bring a corresponding increase in the respective limit in pension sector because the relevant law — the Pension Fund Regulatory Authority Act — says that the foreign holding ceiling in the pension sector will be the same as in insurance.
The Bill, the first version of which was tabled in Parliament in 2008 by the UPA-I government, has had a chequered journey that straddled three governments. It was redrafted several times, underwent scrutiny by a couple of house panels and caused dramatic shifts in political posturing.
On December 26, the Modi government issued an ordinance giving effect to the changes the Bill proposed to make in the relevant Act. This was after it failed in its bid in August to get the Bill approved by the Upper House and had to send it to a select committee. With some changes as suggested by the select committee having been included, the Bill replacing the ordinance was passed by the Lok Sabha on March 4.
While foreign insurance giants AIG, Standard Life, MetLife, Sun Life Financial, Prudential, Nippon Life Insurance, Generali, Allianz and Aegon all already have joint ventures here, they are believed to have keen interest in the Indian insurance market that is on the cusp of big growth. However, the delay in raising the foreign investment limit have long thwarted their expansion plans. In fact, the delay in hiking the cap had forced Australia’s AMP and New York Life to exit the country.
The insurance Bill proposes that the 49% ceiling will be a composite one, comprising both foreign direct investment and foreign portfolio investment (FPI). The new cap will also apply to insurance brokers, third-party administrators, surveyors and loss assessors and other insurance intermediaries. The Congress, despite being the proponent of the Bill, had opposed inclusion of FPIs within the enhanced ceiling in August.
Currently, out of the 24 life insurance companies in India, 22 have foreign partners and many of them would be looking at more foreign funds, analysts said. General insures would also benefit from foreign capital; among 28 firms in the sector, 18 already have foreign partners.
Shashwat Sharma, partner, KPMG in India, said although the raised cap would result in capital flows, which domestic firms would aggressively use, the window would depend on the structure of the respective joint venture agreements. “Enhanced foreign investment limit will enable firms to build new distribution channels, create new markets, launch products and embrace better technologies,” he said.
According to Sharma, better valuation resulting from larger foreign investment would push many local firms compliant with the relevant Irda norms to launch IPOs. Firms like Reliance Life Insurance, SBI Life Insurance, HDFC Standard Life, ICICI Prudential and Bajaj-Allianz are likely to go public, with the benefit of capital base expansion enabled by enhanced foreign investment.
According to RV Verma, whole-time member, PFRDA, the increase in foreign investment cap will create greater interest in the nascent Indian pension sector. “At the moment, there are eight pension fund managers under New Pension Scheme. We expect more players to enter the sector with foreign joint venture partners which will help bring in expertise and technology to the sector,” he said, adding that statutory regulations to be notified shortly would give confidence to foreign firms to partner with Indian pension fund managers.
Ever since the insurance sector was opened up by Atal Bihari Vajpayee’s NDA government in 2000, a clutch of life insurers and general insurance have entered the sector, given the immense potential of the Indian market undermined by a low insurance penetration (premiums underwritten as a proportion of GDP) of less than 4%, compared with the global average of 6.5% and over 10% in many developed economies.
The political vacillations regarding the Bill, however, were evident from the fact that a standing committee headed by the former finance minister and BJP leader Yashwant Sinha had said the hike in foreign investment ceiling was not necessary and the Congress stymied its passage in August last year.
** This is a highly positive development. We can confirm that Axa will step up their equity investment to 49% , says Sunil Mittal, Chairman, Bharti Group.
** Congratulations to the government for passing the Insurance Bill after such a long journey. The sector is one of the largest investors in India
Analjit Singh, Chairman, Max Group.
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