Financial Daily from THE HINDU group of publications
Saturday, Nov 06, 2004
Foreign Direct Investment
Money & Banking - Insurance
Government - Policy
Govt puts on hold plan to hike insurance FDI limit
Sarbajeet K. Sen
New Delhi , Nov. 5
THE four-month old tiff between the Government and the Left parties on foreign direct investment (FDI) in select sectors has claimed its first major casualty. Buckling under Left parties' pressure, the Government has finally put on hold its proposal to hike the FDI cap in the insurance sector from the present 26 per cent to 49 per cent.
The Finance Minister, Mr P. Chidambaram, has taken the decision not to go ahead with the proposal at present. "The Finance Minister has decided to put on hold the proposal to raise the insurance FDI cap," a senior Finance Ministry official said.
The proposal to hike the insurance cap was mooted in the Union Budget for 2004-05 by Mr Chidambaram, along with proposals to hike the cap in aviation from 40 per cent to 49 per cent and in telecom from 49 per cent to 74 per cent.
The move to drop the proposal for the insurance sector can be seen as a concession given by the Government to the Left parties in exchange of the latter's decision not to come in way of the hike in the FDI limit in aviation. The FDI limit in domestic private airlines had been hiked to 49 per cent a week ago with riders that foreign airlines would not be allowed to pick up stake in the aviation companies.
Soon after the Budget announcement, the Left parties had come out strongly with the entire set of proposal on FDI hike, with their opposition being strongest on the insurance front. However, intense negotiation had followed resulting in what now appears to be a bit of give and take.
Insurance FDI had always been the most delicate among the three sectors. Unlike the aviation and telecom caps that required only executive orders to be made effective, FDI hike in insurance requires an amendment to the Insurance Act. With the Left parties holding crucial numbers in the Lok Sabha, any slip-up would have caused major embarrassment for the Government on the floor of the House had it tried to push ahead with the proposal.
Having tied the score at one-all on aviation and insurance, all eyes would now be on the deal on telecom FDI. Neither the Government nor the Left parties appears to be anywhere close to delivering the knockout punch for a two-one victory.
The telecom move has been stuck on security concerns involved in handing over majority control to foreign entities.
There are also suggestions that the proposed hike would favour only a few telecom companies.
Mr Chidambaram has on several occasions argued that despite the 49 per cent cap, the effective foreign holding in many telecom companies is far in excess. He has pointed out that foreign investment was being canalised in the sector in a `non-transparent manner' through complex holding structures.
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