The Government has decided to stick with its earlier plan of hiking foreign direct investment (FDI) in the insurance sector to 49 per cent from the existing 26 per cent. This is despite the Standing Committee on Finance rejecting the Government’s proposal to raise the FDI cap in insurance companies to 49 per cent.
Parliamentary Panel recommendations are not binding on the government. Finance Minister P. Chidambaram on Tuesday reviewed the proposals in the Insurance Laws (Amendment) Bill and decided that the FDI cap of 49 per cent, as proposed, should be retained, official sources said.
This means the UPA Government is confident of mustering support for the passage of the Bill in both the Houses despite the numbers not being entirely in its favour.
FDI IN PENSION SECTOR
The Centre has also decided that the FDI cap on pension would be 49 per cent. A specific provision would be inserted in the Pension Fund Regulatory and Development Authority (PFRDA) Bill, 2011 for this purpose, sources added.
Earlier, the Government was looking to spell out the foreign investment policy in the pension sector under FEMA (Foreign Exchange Management Act). There is no provision in the PFRDA Bill on FDI.
Vulnerabilities
The Government had told the Parliamentary Panel that spelling out the foreign investment policy in the pension sector under FEMA was in line with most of the recent laws in the financial sector. However, the Standing Committee did not favour this approach for the pension sector.
In its report on the Insurance Laws (Amendment) Bill tabled in the Lok Sabha last year, the Standing Committee had said any further hike in FDI in the current environment of economic woe may not be in the interest of the insurance industry.
The proposal to hike FDI cap seems to have been decided upon “without any sound and objective analysis of the status of the insurance sector following liberalisation”, the Panel said. “Increased role of foreign capital may lead to the possibility of exposing the economy to the vulnerabilities of the global market,.. flight of capital and also endangering the interest of policy holders.” However, the Panel had agreed on the need to bring in comprehensive changes to the archaic insurance sector laws.