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Cabinet eases insurance and pension FDI norms

Investors to cheer, but opposition likely to try and block several decisions that require Parliament’s approval
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First Published: Fri, Oct 05 2012. 12 42 AM IST
Finance minister P. Chidambaram. Photo: Hindustan Times
Finance minister P. Chidambaram. Photo: Hindustan Times
Updated: Fri, Oct 05 2012. 12 43 AM IST
New Delhi: The Union cabinet relaxed foreign investment rules for insurers and pension fund managers, cleared the new Companies Bill and approved another legislation that deepens commodity markets, continuing a wave of measures aimed at building investor confidence that it embarked on less than a month ago.
The cabinet also approved the draft of the 12th Five-Year Plan, which seeks to increase funding for social sectors such as health and education besides boosting economic growth.
While investors are certain to cheer the government’s moves, the opposition is likely to try and block several of them that require Parliament’s approval, including legislation to increase the cap on foreign direct investment (FDI) in private insurance and pension fund managers to 49%. The government has tried to woo the opposition by largely sticking to the recommendations made by the parliamentary standing committees in each case.
Still, the controversial measures regarding insurance and pension funds do signal the government’s intent to push ahead with investor-friendly changes in policy aimed largely at foreign companies and investors in an attempt to bolster the fading India story. And should the government manage to push the pension and insurance Bills through Parliament—the Companies Bill and the one that gives more powers to the commodity market regulator are relatively non-controversial and will likely sail through Parliament—it will end up being a breather for cash-starved insurance companies apart from attracting foreign investors to the country’s pension funds business.
The United Progressive Alliance (UPA) government’s sense of urgency is understandable given that the election season has begun. A poor performance will further shrink its already small window of opportunity to push policy changes.
Rajesh Relan, managing director and country manager at MetLife India Insurance Co. Ltd, said the biggest benefit of increasing the ceiling on foreign investment in insurers would be growing the industry by increasing the reach of insurance with a range of products that are focused on the uninsured.
Shashwat Sharma, a partner at audit firm KPMG, said the move will boost the confidence of foreign insurers and investors. “The insurance industry has been struggling for a while on capital, which will be now be forthcoming,” he said.
It will do all that, but only if the Bill is passed by Parliament.
Trinamool Congress chief Mamata Banerjee said through her Facebook page that she will move a no-confidence motion against the “minority government” at the Centre and will soon meet the President.
“Is it the intention of the UPA government to sell out the country?” she asked, referring to the decision to allow up to 49% foreign ownership in insurance companies, which according to her will make “lifelong savings of individuals totally insecure”.
Still, the stance of the main opposition Bharatiya Janata Party (BJP) should give the government some hope.
The party remained ambivalent on whether it will support these measures in Parliament, saying it would first like to see the “fine print” of the reforms.
On the issue of FDI in insurance, BJP spokesperson Prakash Javadekar said, “We are not opposed to FDI in insurance and pensions, as we created it. Our concern is that many foreign companies have already invested more than 26% through debenture-type investments. Now, that will be converted into equity, so no new FDI will come in.”
On the issue of similar investment in pension funds, he said the government has to ensure “sovereign guarantee of the pension fund for minimum returns of 8.5%”, protection of labour interest, and security of the pension fund itself.
Finance minister P. Chidambaram struck an optimistic note.
He said creating legislation in a Parliament where a government does not have an absolute majority is a process of negotiation and one should not start with the premise that the Bills will not be passed by Parliament. “I also remember the president of the principal opposition party’s statement that they support FDI in areas other than multi-brand retail,” he added.
The government also seems to have kept its options open, at least in the case of foreign investment in pension funds, by saying this would be the same as whatever Parliament decided for insurance companies. That means it could be 26% if Parliament doesn’t approve an increase in the cap on foreign investment in insurers.

Companies, competition

The cabinet also cleared the long-pending new Companies Bill that will comprehensively change the way companies are governed in India. On 13 August, a parliamentary committee had cleared the Bill. The new Bill makes expenditure on corporate social responsibility by companies mandatory, seeks to reduce gender disparity by laying down quotas for women on boards, tries to improve the governance of companies by ensuring at least one-third of the board is composed of independent directors who can serve for a maximum of 10 years, makes the rotation of auditors mandatory, and makes class-action suits against companies possible.
It has already been hailed by analysts and investors as one that will promote transparency in investments, strengthen the rights of minority shareholders, and make it tough for companies to hide illegal transactions.
The new Competition Act, also cleared by the cabinet, ensures that all sectors come under the purview of the Competition Commission of India (CCI). It, however, does lay down some caveats, with regard to mergers in the banking sector, in the case of failing banks and mergers.

Powering commodities

The government also gave full autonomy to the Forward Markets Commission, effectively making this agency the regulator of the commodity futures market, by approving the Forwards Contracts (Regulation) Amendment Bill, 2010. “New products like ‘options’ will be allowed in the commodity market. This will benefit various stakeholders, including farmers, to take benefit of ‘price discovery’ and ‘price risk management’,” the government said in a statement.

Community rights

The cabinet also approved an amendment to the Wildlife Protection Act, giving power to local administrative bodies, which will now need to be consulted before the area under their purview is declared a national park or sanctuary.
Provisions of the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) were also incorporated into the Act. CITES is an international agreement between governments that aims to ensure that international trade in specimens of wild animals and plants does not threaten their survival.
The cabinet also approved the ratification of the Nagoya Protocol on access and benefit sharing by India. Though India has signed the protocol, the country hasn’t ratified it yet.
The Nagoya Protocol is the first international protocol on biodiversity. It allows local communities to gain from the commercially exploitation of their natural resources by companies, which will have to share their profits with the former.
India is currently hosting the 11th Conference of Parties to the Convention on Biological Diversity in Hyderabad.
The latest wave of policy changes comes in the wake of radical measures, including the easing of foreign investment rules in retail and aviation, and an increase in the price of diesel.
Referring to the changes made on Thursday, Pralay Kanungo, head of Centre for Political Studies at Jawaharlal Nehru University, said the UPA’s options are limited.
“The government is taking a calculated risk in a considerably short period left for it. It has to adopt an aggressive stand and push its reform agenda, which is expected to be followed by certain welfare measures. It hopes that these will create a feel-good factor among the middle class,” he said.
The cabinet has also increased the subsidy for the distribution of imported pulses through the public distribution system (PDS) to below poverty line families from Rs.10 per kg to Rs.20 per kg. The cabinet committee on economic affairs also approved “end-to-end” computerization of targeted PDS operations with an outlay of Rs.884.07 crore on a cost-sharing basis with the states in order to weed out bogus ration cards and better target subsidies.
The cabinet also approved doubling of the existing risk allowance, hospital patient care allowance and patient care allowance for around 200,000 Union government employees at risk due to the nature of their duties.
Aniek Paul in Kolkata, and Neha Sethi, Prashant K. Nanda, Tarun Shukla, Sahil Makkar and Anuja in New Delhi contributed to this story.
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First Published: Fri, Oct 05 2012. 12 42 AM IST
More Topics: FDI | insurance | pension | Chidambaram | reforms |