Cabinet to likely approve hike in FDI cap in insurance and pension sectors to 49%

The Cabinet will likely approve a proposal to hike the cap on foreign direct investment (FDI) in the insurance and pension sectors to 49 per cent from 26 per cent tomorrow, 4 October.

The Bill will have to be approved in Parliament after the Cabinet has okayed it.

The proposal was floated by Pranab Mukherjee when he was the finance minister, and was sent to the Cabinet for approval in May, but the decision was deferred, underlining the difficulty the Centre faced for driving reforms that are sorely needed to shore up weakening economic growth.

A parliamentary standing committee headed by Bharatiya Janata  Party’s Yashwant Sinha had asked the government to cap FDI in the sector at 26 per cent, confounding the government's plans to raise the limit in tandem with an opening up of the insurance sector.

Insurance reform is widely seen as crucial because, according to Insurance Regulatory and Development Authority (IRDA) estimates, the sector needs a capital infusion of over $12 billion over the next five years.
Domestic and foreign insurers, which have invested billions of dollars in India over the last decade, have been lobbying the government for years to raise the FDI limit to 49 per cent from 26 per cent.

Along with raising the FDI limit, the insurance amendment bill aims to strengthen regulation of the sector and allow foreign re-insurers to enter the Indian market.

India has 24 life insurance companies and an equal number of general insurers.

On Monday, Finance Minister P Chidambaram announced a revival package for the life insurance sector. The package includes easing investment norms for insurers, faster clearance for new products, easing of procedures and allowing banks to sell products of more than one insurance company.

Mr Chidambaram said IRDA will consider relaxing norms for insurance companies investing in debt instruments to encourage investments in securities other than the AAA-rated ones.

The IRDA today said it is also likely to issue the final initial public offering (IPO) guidelines for general insurance companies in the next two weeks.

"The insurance advisory committee had a look at the recommendations. So it (the final IPO guidelines for non-life companies) should be out in the next two weeks," IRDA chairman J. Hari Narayan said on the sidelines of a CII event.

"This year we have finalised the amalgamation of life (companies) and IPO of non-life, so these two will be made regulation soon.

"The insurance advisory council has already met, that is the penultimate step. Then it goes to the board and then it is presented," he said.

The insurance regulator issued final IPO guidelines for life insurers last year.

The finance ministry also agreed to address tax-related issues, such as a reduction in service tax, tax treatment of annuity products on a par with the New Pension Scheme and Tax Deducted at Source on commission payments made to agents, of insurance companies.

The ministry has decided to allow banks to act as insurance brokers so they can sell products of more than one insurance company. At present, banks can sell products of just one insurance company through the bancassurance policy.

The Finance Minister said banks should act as brokers and the fiduciary responsibility of the bank will be to the policyholders.

Copyright: Thomson Reuters 2012