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Sarbajeet K. Sen

A formal proposal on the deletion of mandatory divestment issue would, however, come up only if the Finance Minister is able to weather the political storm.

New Delhi , July 16

THE mandatory divestment clause requiring Indian partners in insurance joint ventures to bring down their holding on par with the foreign partner at 26 per cent after a stipulated number of years could be struck off the statute books if the Finance Minister, Mr P. Chidambaram, is able to steer his Budget proposal to raise FDI cap for the sector to 49 per cent from 26 per cent.

At the time of allowing private entry into the sector insurance in 2000, the Government amended the Insurance Act, 1938 to stipulate that all shareholders in insurance companies with holding of over 26 per cent would have to prune it down to that level after the company completes 10 years of operation or "within such period as may be prescribed by the Central Government".

The clause was meant to ensure a level playing field for both the foreign and the Indian partners in the long run.

Senior Finance Ministry officials said that there was a view within official circles that in a liberalised environment there was a strong case for allowing the board of directors of the companies to decide the timing and manner of public floats without interference or directions from the Government.

"If the business is doing well, the promoters would in any case want to go in for public offers and get listed, and in the process dilute their holding in percentage terms. It might be better to leave the judgement on the modalities and timing of public issues up to the companies themselves," they said.

A formal proposal on the deletion of mandatory divestment issue would, however, come up only if Mr Chidambaram is able to weather the political storm brewing over his proposal to raise FDI cap for the sector, along with those in aviation and telecom.

The Left parties have strongly opposed the move, while the BJP has also said that it would vote against the move in Parliament. Unlike the aviation and telecom sectors where the FDI hike can be done through an executive action, FDI hike for the insurance sector would require an amendment to the IRDA Act, 1999 that stipulates the cap.

More Stories on : Insurance | Foreign Direct Investment | Budget

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