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BJP govt ends BJP org’s indecision about FDI cap in insurance

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Union Finance Ministry is contemplating raising foreign direct investment cap in insurance sector from 26 per cent to 49 per cent with some riders like restriction on voting right. The restriction will make sure that the control of the critical sector, involving lifetime’s savings of a large number of masses, does not pass into foreign hands.

“We might increase FDI cap in insurance without commensurate increase in voting rights. We talked with stakeholders and also held high level meeting in ministry,” a senior ministry official said.

At a meeting with the GS Sandhu, secretary department of financial services on Saturday, chiefs of leading private insurance companies said the country could see $8bn to $10bn of inflows into the life and non-life insurance business in the next five years if the government passed the bill to amend the insurance Act. All companies except for one were in favour of allowing higher FDI. One private insurer is however understood to have favoured higher investment from foreign institutional investors over FDI.

The meeting was convened to get the industry feedback on the issue of raising the FDI cap. Sources said the department of financial services has asked them to send across their detailed views and after that some more interaction would be held before a decision is taken by the government on the issue. “The purpose was to discuss how to ensure growth in the sector which is an import social security. We discussed the pros and cons and various options and greater FDI flow in the sector,” said Sandhu, adding that a final view was yet to be taken.

The past

A proposal to hike the FDI cap in the sector was mooted by the previous United Progressive Alliance (UPA) Government and has been pending in Parliament since 2008. The then Opposition Bharatiya Janata Party (BJP) had not opposed the proposal in this sector unlike in the retail sector, most probably as the Bania caste, one of its core voter bases, is involved more in retail than in the insurance sector, and members of the caste vehemently oppose competition with foreign retailers.

The period 2012-13 had witnessed a series of see-saw movements on the matter by the BJP. First, in the wake of reforms announced by the UPA Government in insurance and pension sectors, the party had said, while it was not opposed to more FDI in these areas, certain caveats and conditions should be met to “safeguard the interest of the people”. On the issue of FDI in the insurance sector, then BJP spokesperson Prakash Javadekar had said the Parliamentary Standing Committee on Finance headed by Yashwant Sinha had gone into the issue and recommended 26% FDI. “Sinha was the first one to propose 49% FDI in insurance 10 years ago. That time Congress had opposed it and since we wanted to bring a consensus, we agreed to 26%,” Mr Javadekar had said on 4 October 2012.

Then, former US envoy Frank Wisner, who had worked with the US-based mixed financial services and international organisation AIG, and a group of CEOs began interacting with senior leaders of the government and Opposition including Sinha on raising the FDI cap. “We are open for a discussion with the government. But government leaders are yet to approach us. The BJP will take a call on the bill after talks with the government,” Sinha had told a leading business newspaper on 11 February 2013.

A few months later, faced with protests from within its ranks, BJP was forced to deny that it had reached a deal with the government on raising the FDI cap in insurance to 49% from the current level of 26% on the condition that the voting rights will be pegged at 26%. “There are reports that there is a deal between the government and BJP on passage of financial bills. No such deal has taken place on such bills. We are in no mood for any deal with this government,” BJP leader Sinha told reporters on 7 August 2013.

Back to the present

To deliberate upon the issue, the finance ministry officials held a meeting with the representatives of the insurance sector, including the Insurance Regulatory and Development Authority (IRDA). Following consultation with all the concerned stakeholders, the ministry will now submit a list of possible options to Indian Finance Minister Arun Jaitley, for further consideration and necessary action.

The Standing Committee on Finance had earlier rejected the proposal, saying it may not have the desired effect and could expose the economy to global vulnerability. Last week Sandhu gave a presentation to Finance Minister Arun Jaitley on the issues concerning the insurance sector. The insurance sector was opened up to the private sector in 2000 after the enactment of the Insurance Regulatory and Development Authority Act, 1999. The insurance industry has sought an increase in the FDI limit to raise funds for expansion.

Experts’ view

Those in the particular field of work say that a heightened FDI cap will give more confidence to foreign investors even as 49% share will not give them dramatically enhanced legal rights to control the ventures. “This will serve as an indication of intent towards further opening up of the sector as well as bring about larger economic participation from the foreign insurers during the interim period,” said Vivek Gupta, partner, BMR Advisors. Not all insurers are convinced with such an arrangement, though. “It will be very difficult to convince our foreign partners,” said a chairman of an insurance firm, requesting anonymity.

The government will also discuss the feasibility of allowing 49% foreign investment in the sector with FDI retained at 26% and rest through foreign institutional investors (FII). “Since no insurance firm has opted for a public offer so far, we have to see how effectively this can be used over a longer tenure,” the official said.

If the government decides to keep the FDI cap at 26% in insurance, the limit will be applicable to the pension sector as well.

response

Shares of companies related to insurance business surged up to 10.5 per cent today following reports that the Finance Ministry is contemplating raising FDI cap in the sector from 26 per cent to 49 per cent with some riders. Reliance Capital (up 11.19%), Max India (up 11.02%), Aditya Birla Nuvo (up 4.39%), State Bank of India (up 4.23%), Religare Enterprises (up 2.89%), ICICI Bank (up 2.80%), Bajaj Finserv (up 2.63%) and HDFC (up 2.31%), edged higher. The S&P BSE Sensex rose 467.51 points, or 1.93% at 24,684.85.

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Surajit Dasgupta
Surajit Dasgupta
Co-founder and Editor-in-Chief of Sirf News Surajit Dasgupta has been a science correspondent in The Statesman, senior editor in The Pioneer, special correspondent in Money Life, the first national affairs editor of Swarajya, executive editor of Hindusthan Samachar and desk head of MyNation

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