Indian Finance Minister, Nirmala Sitharaman has increased the Foreign Direct Investment cap from 49% to 74%. The government has raised FDI limit in the insurance sector to 74 per cent to attract more significant overseas capital inflows and increase insurance penetration in the country.
Under the new structure, she said, the majority of key management persons and directors on the board would be resident Indians. Also, at least 50 per cent of directors would be independent directors. She also said that a specified percentage of profits would be retained as a general reserve.
FM Nirmala Sitharaman has proposed to amend the Insurance Act, 1938 to increase the permissible FDI cap in insurance companies from 49 per cent to 74 per cent. Also, the move cleared amendments aimed towards attracting investments and bringing transparency in the insurance companies working. In budget 2021–22, she has allowed foreign ownership and control with safeguards. She said that an investor charter would be introduced as investors’ right across financial products for investor protection.
In the past, in 2015, the government had hiked the FDI cap in the insurance sector from 26 per cent to 49 per cent. The life insurance penetration is 3.6 per cent of the country’s GDP, which is way below the global average of 7.13 per cent. In the case of general insurance, the penetration is even worse standing at 0.94 per cent of GDP, against the world average of 2.88 per cent.
In the past, the government has allowed a 100 per cent foreign direct investment in insurance intermediaries like reinsurance brokers, insurance brokers, corporate agents, insurance consultants, surveyors, loss assessors, and third party administrators.
The hike in FDI from 49 per cent to 74 per cent in the insurance sector will help attract higher foreign investment and be useful in strengthening the sector. An additional infusion of capital in insurance will enable the sector to grow and help insurance reach the grass-root level. It will help make health insurance plans widely available. The move is also supposed to create more jobs for young people in the country, which is highly needed.
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A more liberal FDI policy in insurance is certainly deemed to attract a higher amount of foreign capital to increase insurance penetration in India. The move will also work as an impetus to the insurance industry to build better digital systems and infrastructure capabilities post-pandemic.
The pandemic has clearly shown the need for health insurance plans in the country. It has been demonstrated that further insurance penetration in India is the need of the hour. And for insurance penetration, the capital infusion is required. The FDI hike will allow the foreign promoters to buy out their cash-crunched Indian partners if needed. This will give insurance companies the infusion of cash required.
This will help the sector realize its full potential in the country and strengthen it. The increase in insurance cap is also a good thing for a new insurance company. It will not be a game-changer for existing companies as most large insurance companies don’t really need capital from foreign investors.
Source — Budget 2021 — Union Budget 2021 | FDI limit in insurance hiked to 74%
