The Department of Promotion of Industry and Internal Trade (DPIIT) has indicated the government’s decision to increase Foreign Direct Investment (FDI) threshold in the Indian insurance sector to 75% from 49% (2015). This statement was a result of poor density and penetration in the country’s indisposed insurance sector.
What led to this announcement?
According to reports by IRDAI, insurance penetration in India stood at 2.74% for life insurance policies and 0.97% for non-life insurance plans, despite the existence of 60 companies.
The above data is significantly low compared to developed nations like Japan, UK, Singapore, etc. This clearly indicates a massive need for growth in India’s insurance sector and the deprivation of a majority of the Indian population.
As per the press note by DPIIT, this amendment will take effect from the Foreign Exchange Management Act (FEMA) notification issuance date.
This bill was passed in Parliament in March 2021 and is an amendment of the Insurance Act, 1938.
A closer look at the Budget 2021: FDI limit hiked to 75% under automatic route
The recent announcement is a significant step for the Indian insurance sector. Additionally, the safeguards announced in this amendment include:
- The board of directors and key managerial persons will primarily comprise Indian residents.
- 50% of a company’s directors need to be independent.
- Insurance companies should retain a percentage of their profits as general reserve.
This will ensure liquidity and adequacy to meet liabilities in different scenarios, further building policyholders’ confidence.
Moreover, here are a few benefits of an increased FDI threshold limit:
- This amendment lets foreign investors hold a stake in the company they’re investing in. It will subsequently escalate managerial skills, foreign capital inflow, innovation, solvency ratio, and technical knowledge of the insurance sector.
- This decision will be helpful to insurers in India due to a recent RBI proposal. The proposal indicated its attention to cap banks’ investment limit in non-core business activities, including India’s insurance sector, to 30%.
- It will also generate momentum in the direction of a risk-based capital regime, thereby encouraging insurers to adopt better risk management policies.
- Further, a hike in threshold is expected to benefit private life insurance agencies, non-life insurers, and even specialized private health insurance companies.
Previous amendment (2015)
Indian insurance industry was liberalized in 2015 to increase FDI limit to 49% from 26%.
However, after the initial days of this amendment, the Indian Insurance Companies Rules 2015 prescribed that FDI investment up to 26% under automatic route was allowed. Any proposal that takes total investment above 26% and up to 49% had to seek Foreign Investment Promotion Board’s approval.
Later, this rule was amended in 2016 to legitimize 49% of foreign investment in India’s investment sector under automatic route.
To conclude, it is evident that Budget 2021 has brought about certain policy changes and extensive regulations to implement the government’s decisions. This announcement to hike FDI limit in the insurance sector to 75% under automatic route is a comprehensive step towards the right direction, aiming to create positivity towards international investment’s scope in the Indian insurance sector.