Increase in FDI cap needed to reform the insurance sector

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The Insurance sector in India has been adversely affected by the coronavirus pandemic. The fortunes of small insurance firms can be wiped out by the number of COVID-19 related claims. The foreign direct investment limit needs to be increased to 74% from the present 49% to help the local companies during these uncertain times.

The Insurance Regulatory and Development Authority of India (IRDAI), the regulator has suggested that the FDI needs to be brought at par with the banking sector. An increase in the FDI limit to 49% from 26 % took 7 years to be passed and there was stiff opposition, so the government is hesitating to take this decision because it might face opposition from party members and allies. The fear of dominance of MNCs over the Indian Insurance sector is the prime reason for opposition.

The foreign exchange inflows were considerably low when the Foreign Direct Investment was increased to 49%. Actual infusion into business was just 5400 crores while the reports had pegged the inflow of capital at rupees 25000 crores after the FDI limit was increased, the rest were local firms selling their stakes to foreign Joint Venture partners.

Indian management control clause and anticipation of further relaxation of limit resulted in no new foreign company entering the Indian market. Foreign companies wanted equal rights with their Indian Joint Venture partners, but any business strategy or board-level decision would need approval from the majority of Indian shareholders.

It is estimated that at least fifteen thousand crore rupees are required by insurance companies over the next three years, the question is where will this money come from?

Allowing foreign firms to hike the Holdings to 75% and removing the restrictions is the way to bring capital to the insurance sector. Many Indian shareholders in insurance joint ventures are heading for the exit and others are not too keen to make further investments. Wadhawan Global Capital selling DHFL General Insurance to Sachin Bansal, Rajan Raheja Group announcing plans to sell its entire 51 percent stake in Raheja QBE General Insurance to Paytm’s Vijay Shekhar Sharma are some examples.

Public sector banks are also looking to reduce their stake in insurance ventures. IDBI Bank has announced its plan to sell a stake in IDBI Federal Life Insurance. Relaxing the FDI limits will help in increasing capital, create jobs, and increase insurance penetration. India can achieve the word average of 7.23 premiums as a percentage of GDP from the stagnant 3.76 percent. If the foreign players enter there will be a 15% growth in the 1.5 million employment base in the insurance sector.

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