The government may remove several procedural impediments in attracting foreign direct investment (FDI), and allow up to a 74% overseas stake in the insurance sector as it prepares a Budget that is counting on FDI emerging as a major source of non-debt finance, two officials close to the development said.
The FDI policy is under review to increase inflows of foreign investment. Some sectors such as financial technology, financial services and insurance have huge potential to attract greater overseas investment and the Budget, to be unveiled on February 1, could contain policy directives facilitating FDI in various areas, the officials said, requesting anonymity.
“After liberalising FDI in insurance intermediaries, the government is considering raising foreign investments in insurance companies. It is one of the key demands of various global investors. There are some views to initially increase the cap on the insurance company to 51%, which could be later raised to 74%. A final view will be taken by the competent authority,” one of the two officials, who works in an economic ministry, said.
In February last year, the government had amended the FDI policy to allow 100% foreign investment in insurance intermediaries such as insurance agents, web aggregators of insurance policies and brokers. The FDI cap on insurance companies remained at 49%.
Experts said FDI cap on insurance company was first raised from 26% to 49% in March 2016, but it did not enthuse foreign investors who wanted management control with at least a 51% stake.
“The last FDI limit hike from 26% to 49% did not generate the required inflow due to the lower rights [in managing a company’s affairs] to the foreign partner,” Nilaya Varma, co-founder and CEO of consulting firm Primus Partners, said.
Ideally, the FDI limitin n insurance firms should be raised to 74% to attract significant interest from global investors, Varma said. “The Indian insurance sector needs urgent fund infusion given the pandemic [Covid-19] impacting key ratios. There is very limited domestic appetite to provide funds currently, as banks and other financial institutions are managing the impact of the pandemic on their portfolios,” Varma added.
Divakar Vijayasarathy, founder and managing partner at consulting firm DVS Advisors LLP, said: “It’s high time the government raised the FDI limit in insurance from the current limit of 49% to 74%. Even the regulator has recommended such an increase.”
The Covid-19 pandemic has exposed the limited insurance coverage in India and the shortage of capital in the insurance sector, he said.
“Though figures indicate that ₹25,000 crore of FDI was received in the sector after the increase in the limit, only ₹5,400 crores of additional capital infusion has happened in the sector. Further estimates also indicate that insurance companies might require an additional ₹15,000 crore of capital over the next three years, which could be made easier with the enhancement of FDI limits,” he added.
The government official cited above said that the Budget would focus on facilitating private investments, both from domestic as well as foreign investors, given that public funds are limited and would be mostly be spent on providing health and other amenities to the underprivileged.
“FDI is a good source of non-debt finance, which is required to boost economic growth,” he said.
The Budget for fiscal year 2021-22 is expected to focus on reviving economic growth, which was battered by the nationwide lockdown imposed on March 25 to check the spread of Covid-19. As a result, the Indian economy contracted by 23.9% and 7.5% in the quarters ending June and September; according to the first advanced estimate by the National Statistical Office (NSO), GDP is expected to contract by 7.7% in fiscal 2020-21.
India has seen double-digit growth in FDI in the first seven months of 2020-21. Total FDI inflows to India amounted to $46.82 billion in April-October, 2020, compared to $42.06 billion in the year-ago period.