The hike will offer foreign promoter an opportunity to buy out their cash-strapped Indian partners if necessary
India's Finance Minister Nirmala Sitharaman on Monday, in her Union Budget speech, announced a proposal to increase the foreign direct investment (FDI) limit in the insurance sector to 74 per cent.
Sitharaman said the Insurance Act 1938 will be amended to "increase permissible FDI limit from 49 per cent to 74 per cent in insurance companies and allow foreign ownership and control with safeguards".
"Under the new structure, the majority of directors on the board and key management persons would be resident Indians with at least 50 per cent of directors being independent directors and specified percentage of profits being retained as general reserves," she said.
"Insurance is a capital intensive business, and after the pandemic, many Indian partners are not in a position to invest further capital in their companies. Certain companies also require capital infusion to conserve solvency margins," said Vighnesh Shahane, MD and CEO, Ageas Federal Life Insurance. "The COVID-19 pandemic has shown that further penetration of Insurance in India is needed and capital infusion is necessary."
"The FDI hike will offer foreign promoter an opportunity to buy out their cash-strapped Indian partners if necessary and provide the needed cash infusion," he said.
The proposal is expected to attract large foreign investment, and experts believe the move would lead to further deepening insurance penetration in India.
"A more liberal FDI policy will certainly attract higher foreign capital, which will aid in increasing insurance penetration in India," said Shailaja Lall, Partner, Shardul Amarchand Mangaldas and Co. "It will also provide an impetus to the insurance industry to scale up and build more digital and infrastructure capabilities post pandemic."
The industry has welcomed the government's proposal. It feels the increase in FDI limit would bringing necessary funds into the insurance sector of India.
The experts also believe that enhanced foreign investments would lead to the creation of more jobs.
"This was required as insurance business require huge capital and deep pockets; and with the increase in FDI limits, additional infusion of capital will enable growth and help Insurance reach to the last mile at the grass root level," said Aatur Thakkar, co-founder and director at Alliance Insurance Brokers.
"This one move will help create more jobs for youth which is the need of the hour. We also appreciate the government's move to keep control in the hands of Indian residents by announcing that the directors have to be of the Indian origin," he said.
Sitharaman also announced that LIC IPO (initial public offer) would be launched within the next financial year. The government would require to amend the LIC Act to launch the IPO, and the finance minister announced that the process would begin in the Budget Session.
"In 2021-22 we would also bring the IPO of LIC for which I am bringing the requisite amendments in this session itself," said Sitharaman.
The finance minister also added that India's government would divest in two PSU banks and one general insurance company in 2022 financial year. She also put disinvestment target at Rs 1.75 lakh cr for 2022 fiscal year.
Besides this, Sitharaman announced a new healthcare scheme — PM Atma Nirbhar Swasthya Bharat Yojana. The government would set aside Rs 64,180 crores for the scheme over six years. Insurance experts feel the new scheme would further the focus on health insurance.
"By focusing on healthcare with the launch of Atmanirbhar Swasth Bharat Yojna, the government has taken a welcoming step to strengthen the country's health infrastructure. This brings health insurance in prime focus, as it is critical for every medical emergency and is a backbone for making medical facilities accessible and affordable to the tier II and III cities,"" said Balachander Sekhar, CEO and co-founder, RenewBuy.com.