In the July budget, finance minister Nirmala Sitharaman had announced that the government will examine suggestions from various stakeholders to further open up FDI in the insurance sector. In order to facilitate the higher investment limit, the government will have to amend the Insurance Act, alter provisions pertaining to Indian ownership, monitor the solvency of foreign firms so that the local business is unaffected by any challenges faced by the parent and that they stick around to honour long-term contracts, said the people cited above.
POOR EXPERIENCE WITH FOREIGN BANKS
If some foreign banks are anything to go by, the government will need to tread carefully, said some experts. “The experience with foreign banks has been very mediocre as they have unwound business in India after their global operations took a hit,” said one of the persons cited above. “And, since insurance, especially life, is a long-term liability and the government will have little power over foreign-owned entities, it has to be very careful before taking such a call.”
The question of control also has to be decided, said one person close to development. “The government is keen on Indian promoters running the show even with only 26% stake in the joint venture,” he said.
Industry participants have also pointed to confusion about defining and structuring foreign direct investment and foreign portfolio investment (FPI) in a company. Some listed companies have had FPI investment over the years that if counted under FDI will amount to an 80-85% overseas stake.
IRDAI may also raise queries over the impact of a foreign entity buying out or increasing stakes in a domestic firm and what happens to policyholders who have bought insurance due to their comfort with the Indian entity. Also, whether a change in ownership would be tantamount to nullifying contractual obligations.
India has 24 life insurance companies and 34 general insurance firms. Only about four in 100 Indians have life cover, offering companies a potentially massive market in the world’s second-most populous country.
Source: The Economic Times