Finance Ministry may pitch for 49% FDI in insurance with riders

NEW DELHI, 2 June-2014, ET: The finance ministry could recommend an increase in the limit on foreign direct investment (FDI) in insurance sector to 49% from 26%, albeit with a few restrictions to push the crucial reform.

The ministry is likely to propose capping of voting rights for foreign investors, a senior finance ministry official said, explaining that the rationale is to ensure that the control of the critical sector involving lifetime’s savings of a large number of people does not pass into foreign hands.

Finance Ministry may pitch for 49% FDI in insurance with riders

Finance Ministry may pitch for 49% FDI in insurance with riders

“The concern is that a foreign partner may get a big controlling stake even at 49%, if the Indian promoter decides to dilute its stake in favour of other Indian investors,” said the official, who did not wish to be identified.

The finance ministry officials on Saturday met representatives of the insurance sector, including the Insurance Regulatory and Development Authority ( IRDA), two days after finance minister Arun Jaitley had asked them to explore all options to raise funds for the sector.

The ministry will now present to Jaitley the possible options, including capping of voting rights or even a staggered increase in FDI over a period of five to 10 years, the official said. “The basic idea is that insurance companies should remain under Indian control. Within this framework we are looking at all possible options,” the official said, adding that the staggered increase could be implemented in conjunction with the capping of voting rights.

Experts say that such an option 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.