June 19, 2021

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FDI hike from 49% to 74% sets stage for its takeoff

increase in fdi limit

increase in fdi limit

FDI hike from 49% to 74% sets stage for its takeoff

Nirmala Sitharaman, a Finance Minister has announced the Budget of increasing the FDI limit in insurance from 49% to 74%. This could lead to an unprecedented expansion of the insurance sector, its penetration, its level of competition, and also value for customers in terms of better service at low cost.

Foreign inflows in insurance companies will enable them to become more effective vehicles for THE household savings by creating long-term assets in the economy.

This may bring in an initial thrust of foreign capital in the industry, participants in financial services sector. This decision may change the face of the Indian insurance industry in terms of technology, product services and resources. Infusion of capital may also lead to the faster growth and deeper penetration of the private sector all over the country and employment generation in the sector.

Jaspal Bindra, the chairman of Centrum Group said that the foreign joint venture insurance companies were reluctant bringing in their global practices into Indian joint ventures until they had the majority stake. He said “With 74 per cent ownership, now foreign partners will have every motivation to bring in the full game in terms of range of marketing products, range of resources and full technology platform.”

He also added that the insurance sector, currently has issues such as high premiums which affects the valued customers, “I think this will bring in the right amount of competition and the full range of products.”

There are many people who feel that the FDI limit enhancement will lead to the inflow of capital in the companies, it will also develop the insurance industry as a big channel for generating the long-term money for development of the economy and creating long-term assets.

Rashesh Shah, the chairman and CEO of Edelweiss Group said “Equity capital in India is at a shortage so besides leading to deeper penetration and bringing in cost efficiency, the insurance sector will play a big role in the economy as it can channelise household savings into long-term investments. Banks have funds but they are not the investment companies. Besides banks, we need the insurance and pension for creating long-term assets and now insurance will play that role in a bigger way”.

While the insurance penetration as a percent of GDP currently stands at just 3.71%, India has a big unserved market and the experts feel that lowering of cost and offering simpler and affordable products may push this up.

In past, raising FDI in insurance has faced political opposition. A bill to raise FDI in the sector to 49% from 26% was introduced by the UPA government in Parliament in 2008. It could not be passed due to opposition parties and others till 2015, when the BJP-led NDA government promulgated an Ordinance to give effect to higher FDI in the insurance sector.

There has been opposition to increase the FDI as it is seen as exposing the sector to short-term volatility, possibility of sudden pullout of funds by foreign companies and putting hard-earned savings of policy holders at risk.

Sitharaman said that under the new structure, the majority of Board of directors and key management persons would be resident Indians, with at least 50% of directors being independent directors, and specified percentage of profits being retained as general reserve.

Due to Covid there has been a rise in demand for life and health insurance, the sector has been on a steady expansion given its low base. In 9 months, between April and December 2020, the first year premium for private sector life insurance companies grew by 6.54% over the corresponding period last year.

The standalone health insurance companies saw their gross direct premium underwritten (GDPU) increased by 9.5%, the general insurance companies saw their GDPU grow by 1.14%.