In its first major move to boost foreign capital inflows, the Cabinet on Thursday approved raising the ceiling for foreign direct investment (FDI) in the insurance sector to 49 per cent.

However, Government sources said 49 per cent FDI will be allowed only in cases where management control remains with Indian promoters. Also, it will be allowed only through the approval route, which means, the Foreign Investment Promotion Board (FIPB) must give the green signal. FDI up to 26 per cent, however, will be allowed through the automatic route, requiring no FIPB approval and without riders such as differential voting rights or restriction of voting rights for investors.

The 49 per cent FDI will be a composite cap, which means foreign capital can flow in either as direct investment or via the portfolio route, or as a combination of both. Direct investment refers to foreign investors buying equity directly from an Indian company and then becoming part of the board of directors or the management.

However, portfolio investment refers to buying of shares from the stock market by foreign institutional investors, qualified foreign investors or via a sub-account by foreign nationals. These persons will not have any right to be on company boards.

As per SEBI rules, portfolio investment cannot be more than 24 per cent in a listed company. However, this can be raised up to the limit set for the sector after getting shareholder approval.

Once change in FDI cap for Insurance sector is approved by Parliament, it will have direct impact on the pension sector. Since Pension Act clearly prescribes that FDI limit would be at par with the insurance sector. This means FDI in pension will also be 49 per cent.

Pending since 2008 With the Cabinet approving the amendments, the Insurance Laws (Amendment) Bill will now be taken up by Parliament, possibly in the ongoing session. The Bill has been pending in the Rajya Sabha since 2008.

The erstwhile UPA Government had decided to hike the FDI cap in insurance, but could not get the amendments approved in Parliament. At present, there are 23 private sector companies in life insurance and 22 in general (health, motor, travel, etc) insurance in the country.

Industry happy Welcoming the move, Chandrajit Banerjee, Director-General of the Confederation of Indian Industry (CII), said capital infusion in the insurance sector through greater FDI would ensure innovations in product design and distribution, better risk management, introduction of superior technology and higher investments.

“CII believes the end result will be a sizeable improvement in insurance penetration in India, which is now considerably lower than in other emerging economies,” he said.

According to Amitabh Chaudhry, Managing Director and CEO of HDFC Life Insurance, the move will further enable the industry to serve millions of under-insured Indians.

Chaudhry, who is also Chairman of FICCI’s Insurance and Pensions Committee, is confident that many foreign players will enter the insurance and pension sectors at a time when the country is in need of foreign investment.

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