Just over a month after unveiling of the Union Budget 2021-22, a proposal to amend Insurance Act, 1938 has been approved. FDI which was earlier capped at 49% will now be raised to a 74% limit.
Increasing the FDI limit in the insurance sector will boost availability of capital and encourage competitiveness, transparency and efficiency in the sector.
This comes as a welcome move since it has been forecasted that insurance companies might require Rs15,000 crores of capital in the next 3 years, a figure that would be attainable with higher FDI limits.
The insurance industry will also be developed as a source of durable funds to generate long term assets and aid economic recovery after dealing with a massive blow owing to the pandemic.
Insurance firms will also be able to offer a wider range of products at affordable prices.
Insurance penetration in India which is presently just 3.71% of total GDP will also see an increase in a market which is already underserved.
Pushing Through Political Resistance
This development also reflects the government’s resolve to push through reforms which were earlier stalled due to political opposition.
Back in 2008 the UPA govt proposed an FDI hike from 26% to 49% but faced resistance from Left parties and others.
The BJP-led NDA govt then created an ordinance for higher FDI in insurance sector in 2015 after taking office in May 2014.
Other Amendment Inclusions
Resident Indians will comprise the majority of board directors and key management with a quota of at least 50% being independent directors.
A certain percentage of profits also has to be set aside as a general reserve.
Who Will Benefit Most?
The amendment will also usher in global best practices and competition which will lead to costs getting lower.
Small insurance cos and firms where Indian partners are unable to bring in more capital stand to gain the most.
Foreign partners will be able to attract more capital and take over management which will prime the company to tackle competition from larger players.
Over and above economic benefits, increased FDI will also lead to better knowledge, expertise and specialisation along with innovation and new products.
Job creation will also see a boost.
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