Union Budget 2021 can submit a plan trekking the foreign direct investment (FDI) limit in the insurance sector to 74 percent from 49 percent now. Nevertheless, sources told Moneycontrol that numerous Bharatiya Janata Party (BJP) leaders and its NDA allies’ leaders are not entirely convinced about the FDI haul.
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Once the FDI hike is declared openly in Budget 2021, it would require ratification through a modification in the Insurance Laws (Amendment) Act, 2015. Only after this proposition is ratified through both houses of Parliament will the FDI be strolled.
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“There is a feeling among certain leaders that 74 percent FDI will lead to Indian insurers losing the ‘Swadeshi’ tag. This is because foreign insurers may have a higher stake than their Indian counterparts,” said an official.
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The law to heighten the insurance FDI threshold from 26 percent to 49 percent in 2015 took seven years to be passed after a rigid adversary. Even after it was ultimately enacted in March 2015, the sector did not live up to the objectives of a rise in foreign investment inflows.
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After the law was passed, many foreign partakers had hiked their share in the Indian insurance undertakings. They include Nippon Life (JV partner in Reliance Life Insurance), Tokio Marine (JV partner in Edelweiss Tokio Life), and Japan’s Dai-ichi (JV partner in Star Union Dai-ichi Life with a 45.94 percent stake).
Among the recent deals is Belgian multinational insurer Ageas acquiring a 23 percent additional stake from IDBI Bank in IDBI Federal Life Insurance for Rs 460 crore. This bought Ageas’ stake in the insurer to 49 percent. However, all this was nowhere close to the anticipated surge in FDI.
1.The FDI hike proposal
After the BJP government came into power in 2019, the first proposition was to raise the FDI cover in the insurance sector to 74 percent. This was to secure that the insurance sector, which is nowadays capital-starved, receives extra investment.
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While the prospect, after the 2015 FDI hike, was that the insurance sector would receive Rs 25,000 crore’s raw capital, the substantial input into the business was barely around Rs 5,400 crore. The remainder was local firms trading their shares to foreign joint undertaking partners. Such share deals did nothing to enhance the capital circumstance of the insurance corporations.
Sources asserted that the BJP’s confederates have informally communicated their discontent with any more FDI hike stating that it will be “detrimental to the national interest”.
“One way to deal with the concerns is to ensure that the Indian management control clause stays in all joint ventures with foreign partners. This will enable the nationalist agenda to stay intact,” said another senior official.
The government is gawking to maintain the ‘Indian management control’ section to secure that strategic leverage stays with Indian counterparts even if FDI is 74 percent.
2.Will foreign insurers be convinced?
Even when the 2015 FDI hike was declared openly, the ‘Indian management control’ section was a fraction of foreign partners’ disagreement in insurance joint investments. Under the 74 percent FDI hike suggestion as well, this will be a barrier.
Four large global insurers who are JV partners in Indian insurance companies asserted that it does not create business understanding to give rise to additional capital without any discretion.
“To hike their stake to 74 percent from 49 percent, foreign partners will bring in between Rs 600 crore to 800 crore of additional capital. How will it be beneficial to us if we don’t even get to take the final decisions in board matters,” disputed the Asia Pacific region head of an international insurance company.
A senior vice-president for developing markets (including India) at a global insurance corporation concurred. “We have been in the insurance business for about 100 years and understand it well. Why should we make fresh investments if it doesn’t come with the power to take board decisions? Decisions will be taken in the best interests of India because we are here for business,” he added.
When the industry’s loss percentages rise in the midst of the Covid pandemic and surging claims and downward premiums on account of lockdown and public transport constraints, some middle ground will have to be established to receive capital inflows into India’s insurance realm.