Decks set for 49% FDI in insurance

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Capital inflows up to Rs 25,000 crore expected

Decks set for 49% FDI in insurance
The decks have been cleared for parliament to clear the proposal to hike foreign direct investment (FDI) to 49 per cent in life, health and non-life insurance sectors.

As a first step, prime minister Narendra Modi chaired a meeting of the cabinet committee on economic affairs (CCEA) on Thursday that gave the green signal to increase consolidated FDI limit to 49 per cent from prevailing 26 per cent.

This proposal is in sync with the announcement made by finance minister Arun Jaitley in his budget speech on July 10.

Foreign investors in any of the active 29 life insurance companies se­eking to increase their stake to 49 per cent will have to approach the foreign investment promotion board (FIPB) before doing the same. Same is the case with non-life, health and general insurance companies.

As per the proposal cleared by CCEA, management control will continue to be in Indian hands.

A fresh insurance laws (amendments) bill will be moved by Jaitley in Lok Sabha shortly to make the CCEA decision operative. While the government has the numbers to get the bill through, in Rajya Sabha it may require the support of opposition Congress and AIADMK to get the legislation approved.

Arun Jaitley has already sounded out the Congress leadership on the insurance bill that NDA government proposes to bring before parliament, a finance ministry official said.

Hence, the latest bill will be a mirror image of the one that UPA could not get through in the last Lok Sabha that ultimately lapsed. “All amendments to insurance laws hitherto mooted by Chidambaram have been retained to ensure Congress support for the legislation,” said an official.

The insurance laws amendments bill also marks a change in the stand of the BJP as a political formation. The parliamentary standing committee on finance headed by veteran BJP leader & former finance minister Yashwant Sinha had insisted on retaining the 26 per cent FDI cap in insurance sector. With dissolution of the 15th Lok Sabha, the Yashwant Sinha panel recommendations also seem to have been set aside.

The proposal to raise FDI cap has been pending since 2008 when the previous UPA government introduced the insurance laws (amendment) bill. The bill could not be taken up in Rajya Sabha because of opposition from several political parties, including BJP. The insurance sector was opened up for the private sector in 2000 after the enactment of the Insurance Regulatory and Development Authority Act, 1999.

The insurance industry expects additional foreign capital inflows up to Rs 25,000 crore once there’s clarity on the road ahead, vis-à-vis the provision relating to retaining Indian control.

Some insurance industry veterans believe that most funds flow will be in general and non-Insurance companies, while life insurance players are adequately capitalised.

Shashwat Sharma, a partner with independent consultancy KPMG said, “This (hike in foreign direct investment limit) shall definitely evoke interest of global players both present in India and others planning an imminent entry. Once there is proper clarity on interpretation of control by the Indian promoter, additional foreign capital expected across life, health and general insurance companies is between Rs 20,000-25,000 crore.”

But Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services pointed to the fact that “15 life insurance companies have reached a point where they don’t require further capital. On the non-life side, barring 4-5 companies, the remaining don't require further capital. Infusing large foreign direct investment would make the capital inefficient. The top 10 players are sound and robust and capital is not the trigger point that could drive larger growth and penetration.”

While agreeing with Parekh, Karthik Srinivasan, senior vice-president at ratings agency Icra, said life Insurance companies were well capitalised on the back of improved profitability, moderation in growth and accordingly would require capital only as the growth picks up. The general insurance sector would require capital of Rs 7,500–17,500 crore over the next five years with higher requirement from the private sector.”

Industry players prefer that foreign companies bring in additional capital by expanding the equity base rather than allowing desi promoters to sell his part of equity to a foreign promoter.

Still, low insurance penetration of just 6 per cent in India is expected to provide opportunity for foreign insurance companies to infuse more funds or see entry of new, larger players. Of the 1.2 billion Indians, only 5 per cent have a reasonable health cover while just 4.4 per cent have life insurance cover.

Penetration of non-life insurance has been even lower at 0.55-0.71 per cent over the last 11 years, rising to 0.78 per cent in 2012. Even in this, around 83 per cent premium collected was towards savings and investment while just 17 per cent was for insurance cover.

Though India is one of the top 10 insurance markets, India’s insurance penetration has been one of the lowest globally, opening a good potential for FDI investments, especially for the long term.

Increase in foreign direct investment limit must be seen in context of the fact that the cap has been lowest globally. In countries like China, Indonesia and Malaysia, the FDI limit has been set at 50, 80 and 51 per cent respectively. In several other countries like Vietnam, Hong Kong, Taiwan and South Korea, foreign direct investment limit is 100 per cent.

As per Life Insurance Council, an industry body, the potential for FDI was about $10 billion in the near term.

Welcoming the decision to increase the cap, Rajesh Sud, chief executive and managing director of Max Life Insurance said, “…This move should bring in the much required long-term capital for the sector. It will also bring in domain capital, which is of critical importance in this phase of growth of life insurance industry.”

Former Irda chairman J Hari Narayana however thinks that the FIPB route for increasing foreign direct investment in existing companies would be cumbersome. Hari Narayana added, “This is because insurance companies will have to drive growth by infusing capital on an ongoing basis to maintain solvency at 1.5 times their liabilities. Allowing the insurance regulator to permit additional capital infusion through the automatic route would have been the ideal situation.”

Amitabh Chaudhry, managing director and chief executive officer at HDFC Life Insurance, has a different take. “We are certain that many foreign players will enter both insurance and pension sectors at this opportune time when the country is in need of foreign investments, as the FDI limit in pensions is tied to the foreign direct investment limit in

insurance.”

However, Monish Shah, senior director at independent consultancy Deloitte, thinks that access to capital would emerge as a competitive factor. Companies that are able to access such capital will be in an unviable position of consolidating their market shares. The next round of capital infusion, Shah thinks, would lead to selective consolidation in the Indian insurance market: stronger players having strong capital base may access a war chest to acquire smaller players.

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