The Union Cabinet has given its nod to increase the foreign direct investment (FDI) limit to 74 per cent from the current 49 per cent. With this approval, the government has also done away with the previous rule to allow ownership and management control with Indian. The Cabinet in its meeting on Wednesday approved amendments in the Insurance Act, 1938, news agency PTI reported citing sources.
The decision regarding increasing the FDI was taken during Budget 2021 on February 1. "I propose to amend the Insurance Act, 1938 to increase the permissible FDI limit from 49 per cent to 74 per cent in insurance companies and allow foreign ownership and control with safeguards," Finance Minister Nirmala Sitharaman in her speech had said.
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The new structure allows a majority of directors on the board and management to be resident Indians. Of these, at least 50 per cent of directors should be independent. The companies must retain a specified percentage of profit as a general reserve. The Centre also proposes to bring in a charter for investor protection. Before this, the Centre had hiked the FDI cap in insurance from 26 per cent to 49 per cent in 2015.
The expansion of the FDI in the insurance sector will lead to better penetration of life insurance services across the country. The loosening of restrictions on foreign ownership of insurers will also provide new sources of funding. It will also offer access to external know-how that can support insurers' underwriting performance and unlock new operating efficiencies.
As per the data, India is still way behind in terms of life insurance and general insurance penetration. Life insurance premium as a percentage of GDP is 3.6 per cent in the country, while the global average is 7.13 per cent. Similarly, in the case of general insurance, it is even worse at 0.94 per cent of GDP in India against the world average of 2.88 per cent.
Global rating agency Moody's had earlier lauded the government's decision to hike the FDI limit in Indian insurance companies. Moody's said the potential for higher foreign ownership will increase insurers' financial flexibility by offering additional opportunities to bolster solvency.
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