New Delhi: Efforts have speeded up to relax restrictions on foreign investment in insurance firms, with a group of ministers likely to meet before the end of this week to look at a draft Bill and send its suggestions to the finance ministry, according to a government official familiar with the matter.
The Bill envisages an increase in the cap on foreign direct investment (FDI) in insurance firms to 49% from 26% and the removal of a rule that mandates Indian partners should sell part of their holding, either through a public issue, or other means to broadbase the ownership of such firms. It also allows public sector non-life insurers to sell a minority stake to raise capital.
If cleared, the changes could see the inflow of around Rs20,000 crore of capital into the industry and allow Indian promoters of insurance firms get better valuations.
The legislation has been in the works for some time now, but talk of it has intensified after the United Progressive Alliance (UPA) won a crucial trust vote in Parliament on 22 July that allowed it to continue in power after a former ally, the Left Front, had withdrawn support to the government over the issue of the Indo-US civilian nuclear deal, which it opposes. The Left Front is also opposed to any increase in the cap on FDI in insurance firms.
The Bill was sent by the finance ministry to the cabinet last year, but the latter had asked a group of ministers to discuss the issues involved. However, because the Left Front was opposed to the Bill in any form, the group did not even study it and will only be looking at it this week.
The government official, who did not wish to be identified, added that the group is unlikely to ask for significant changes. Once it clears the Bill, it will be presented to the cabinet and, subsequently, to Parliament. This is likely to happen in the forthcoming monsoon session.
According to Bert Paterson, managing director, Aviva Life Insurance Co. India Ltd, the global economic slowdown has increased the cost of capital. At the same time, Indian promoters of life insurance companies have other businesses that need capital.
Currently, most private insurers make losses, eight years after the sector was opened up to private and foreign investment.
“An FDI increase will release pressure on Indian promoters and help foreign insurers underline their commitment,” Paterson said. He expects a capital inflow of $4-5 billion (around Rs17,000- 21,150 crore) if foreign promoters are allowed to increase their shareholding to 49%.
According to the 2006-07 annual report of insurance regulator Insurance Regulatory and Development Authority, the total paid-up capital in the sector on 31 March 2007 was Rs11,610 crore, of which 95% came from private insurers.
Within the sector, life insurance firms account for most of the invested capital, premium and also higher growth rates in terms of premium. The sector faces an additional problem. High growth rates in the recent past have meant more investments and a longer payback period, as reported by Mint on 12 June.
To be sure, the Bill needs to be cleared by a majority of parliamentarians and that could still prove difficult. The principal opposition party, the Bharatiya Janata Party (BJP), has decided to oppose economic Bills. According to Ravi Shankar Prasad, a national spokesperson for BJP, there is no question of supporting the government on economic reforms, including those related to insurance, pension and banking. “We have serious reservations over the legitimacy of this government,” he added.
BJP member and former finance minister Yashwant Sinha, who oversaw the opening up of the sector in 2000, said that it was the Congress (the dominant constituent of the UPA) that had then pushed for a 26% FDI ceiling.
He added that in 2004 when the UPA had come to power, the BJP had offered to support it on key economic issues. “They had then rejected our offer of support with contempt. We cannot be taken for granted,” Sinha said.
The UPA continues to strike a hopeful note on the possibility of pushing through economic Bills. “I have no doubt in my mind that the leadership of parties will assert itself. And, we will take legislative agenda forward in areas where we agree,” finance minister P. Chidambaram had said on 31 July during a book release function.
Ashish Sharma and Krishnamurthy Ramasubbu contributed to this story.