Higher FDI cap in insurance could attract fund inflows of more than US$2bn

The Indian insurance market could attract INR200bn ($2.74bn) to INR250bn from equity funds and foreign investments in 2-3 years as a result of the government's decision to raise the ceiling on foreign direct investments in insurance to 74% from the current cap of 49%.

That decision was announced by Finance Minister Nirmala Sitharaman in her Budget address delivered on 1 February.

Mr Ashvin Parekh, managing partner at the financial advisory firm Ashvin Parekh Advisory Services, told The Times of India that there are some Japanese and German insurance companies waiting to increase their stakes in their Indian insurance ventures.

Mr Parekh said, “No other market has delivered value the way Indian market has for multinational insurers.” Standard Life’s 8.9% stake in HDFC Life is worth over INR125bn, several times the original investment.

The government had hiked FDI in insurance to 49% from 26% in 2015, but some foreign insurers have chosen not to increase their stake then as the relaxation came with stringent norms requiring all insurers to be “Indian-owned and Indian-managed” whereas the foreign partners were looking for management control and a stake of at least 51%.

“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,” Mr Nilaya Varma, co-founder and CEO of consulting firm Primus Partners, said.

The latest proposal to increase the FDI cap to 74% would require the majority of board directors and key management persons in an insurance venture to be resident Indians with at least 50% of the directors being independent directors. It will also require a specified percentage of profits to be retained as general reserve, instead of being paid out in dividends. It remains to be seen whether the new restrictions would deter foreign insurers from injecting additional funds into their joint ventures.

Mr Divakar Vijayasarathy, founder and managing partner at consulting firm DVS Advisors, said that the COVID-19 pandemic has exposed the limited insurance coverage in India and the shortage of capital in the insurance sector. He indicated that INR54bn ($740m) of additional capital was infused in the sector after the FDI ceiling was raised to 49%.

Source: Asia Insurance Review