On October 4 2012 the Cabinet approved an increase in the cap on
foreign investment in the insurance and pension sectors from the
existing 26% to 49%. The decision clears the way for the measure to
be considered by Parliament in its winter session. However, whether
the increase will clear the political and legislative obstacles in
its path remains uncertain.
The Cabinet's approval of this increase is the latest in a
chain of events spanning more than 20 years. The government's
1991 industrial policy signalled the advent of a liberalised Indian
economy and paved the way for private participation in the
insurance sector. In 1993 the government set up the Malhotra
Committee to review the structure of the regulation and supervision
of the insurance industry, and to suggest reforms. In a 1994 report
the committee recommended, among other things, that the private
sector be permitted to enter the insurance industry and foreign
insurers be allowed to enter the Indian market by forming joint
venture companies with Indian partners.
Cap on foreign ownership
There was considerable delay in actioning the Malhotra
recommendations and particular debate over the correct level of the
cap on foreign ownership. In 1999 the Insurance Regulatory &
Development Authority (IRDA) was set up as an autonomous body to
regulate the insurance industry and develop the insurance market.
In August 2000 private competition was permitted with a foreign
ownership cap of 26%. The 26% cap was intended to be temporary. In
the 2004 budget the then-finance minister, P Chidambaram, announced
that the cap would be raised from 26% to 49%.
This was strongly opposed by a number of political parties and
the coalition government found it politically difficult to push
through the increase. The Insurance (Amendment) Bill 2008 was
finally introduced in the Rajaya Sabha (the upper house of
Parliament), seeking to "raise the foreign equity in Indian
insurance companies from 26% to 49%". Other key
changes proposed in the bill included:
allowing overseas reinsurers to open branch offices to carry
out reinsurance business in India;
allowing Lloyds to enter the market through a joint venture
with Indian partners and its syndicates to operate through
reinsurance branch offices;
lowering the capital requirements for standalone health
insurers to Rs50 million (approximately $9 million) from Rs1
billion (approximately $180 million);
deleting the provisions that give agents a statutory right to
receive commission on the cessation of an agency; and
ending the limits on insurers' management expenses.
The Rajaya Sabha referred the bill to a parliamentary
committee. The committee issued a report in December 2011, in which
it rejected the increase in the foreign investment limit. A period
of speculation followed over whether the government would:
press ahead with the bill, including the increase to 49%;
push through the bill without the increase to 49%; or
let the bill remain in abeyance until after the elections in
In the meantime, the constantly changing regulatory environment
and general discontent with the pace of liberalisation had an
adverse impact on economic growth in the insurance sector and in
India generally, and on the perception of India worldwide. Reports
indicated that foreign investors were looking for an exit route,
withholding or refusing investment in existing ventures or delaying
their plans to enter India. Some foreign investors withdrew from
the market entirely. As a result, the government has decided to
press ahead with the increase to 49%, thereby signalling (along
with a number of other government measures) that India is again
open for business.
The bill is expected to be put before Parliament in its 2012
winter session. However, its passage is unlikely to be smooth as
there are voices of dissent from within both the ruling coalition
and the opposition. The IRDA is supportive of the increase to 49%;
its chairman recently pointed out that "unless we go for 49%,
we will not have the kind of capital required to underpin the
growth of [the] insurance industry". The finance minister has
also made a case for the increase, pointing out that private
insurers require a capital infusion to move forward and an increase
in the foreign investment limit is a precursor to that
If the bill is passed, an inflow of fresh capital, an increase
in the number of insurance joint ventures and faster development of
the market are expected. For now, uncertainty remains and the
industry must wait and see.
Originally published on November 20, 2012 by International
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