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Sarbajeet K. Sen

The proposal has been prompted by the fact that even after three years of the enactment of the Act, not a single private reinsurance venture has set up base in India due to the massive capital requirement which Indian promoters are unwilling or unable to put in.

New Delhi , Sept. 9

The foreign direct investment (FDI) cap on insurance is finally to be raised, but only just.

In what could be a teaser before the big bang, the Government has initiated discussions for partial relaxation of the 26 per cent FDI cap for the limited benefit of the reinsurance sector.

The move would require an amendment to the Insurance Regulatory and Development Authority (IRDA) Act, 1999.

The proposal has been prompted by the fact that even after three years of the enactment of the Act, not a single private reinsurance venture has set up base in India due to the massive capital requirement which Indian promoters are unwilling or unable to put in.

As against the minimum capital requirement of Rs 100 crore for all other insurance companies in both the life and non-life sectors, the requirement of reinsurance companies has been set at Rs 200 crore.

With an across-the-board cap of 26 per cent in place, the minimum capital that Indian promoters of life and general insurance companies have to put in a start-up is Rs 74 crore, while the amount doubles for any reinsurance venture.

"Reinsurance business requires big money which is why till date not a single company has been set up.

This is in stark contrast to the fact that many global insurance majors have tie-ups in the general or life insurance sectors," a highly placed Ministry of Finance official said. "Therefore, we have to see whether we need to relax the FDI limit for the reinsurance sector in order to allow the foreign partner to hold a higher stake."

However, the official refused to speculate on the extent of the new FDI cap that is being proposed when asked whether the limit would fixed at 49 per cent or whether a holding of 51 per cent or more for the foreign partner would be permitted.

Reinsurance companies help in spreading the risk that other insurance companies (mainly in the non-life category) take upon themselves by providing large covers. Thus, insurance companies cede some of their premium to the reinsurance companies who in turn foot any insurance claims that arise.

Currently, General Insurance Corporation (GIC), the national reinsurer, is the sole reinsurance company registered with the IRDA. All general insurance companies are compulsorily required to cede a portion of the premium collected with GIC under the existing regulations.

A few months back, the Government had all but made up its mind to hike the overall insurance FDI limit to 49 per cent.

However, the matter was kept in abeyance presumably because it could be a delicate issue in the run-up to the general elections.

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