Finance Minister Nirmala Sitharaman on Monday introduced a Bill to facilitate increasing Foreign Direct Investment (FDI) limit to 74 per cent in the Rajya Sabha.

“In order to achieve the objective of government’s Foreign Direct Investment Policy of supplementing domestic long-term capital, technology and skills for the growth of the economy and the insurance sector, and thereby enhance insurance penetration and social protection, it has been decided to raise the limit of foreign investment in Indian insurance companies from the existing 49 per cent to 74 per cent,” the Bill’s statement said.

It aims to amend provisions defining ‘Indian Insurance’ and also to allow foreign ownership and control with safeguards. It will legislate one of the key Budget announcement.

Budget pitch

In her Budget speech, Finance Minister had said, “I propose to amend the Insurance Act, 1938 to increase the permissible FDI limit from 49 per cent to 74 per cent in Insurance Companies and allow foreign ownership and control with safeguards.”

The foreign investment in insurance sector was permitted in the year 2000 by allowing the same up to 26 per cent in an Indian insurance company. Later, in 2015, this limit was raised to 49 per cent.

SBI’s analysis

According to an analysis by the State Bank of India, in the last 20 years, private insurance companies have explored many new innovations to boost business. However, due to the nature of this business, the sector needs more capital for growth and regulatory needs. The Covid-19 pandemic has shown that further penetration of insurance in India is needed and for that capital infusion is required.

“However, the Indian promoters are not able to invest further capital in the sector. Further, some insurers need fresh capital infusion to meet the regulatory solvency margins,” the report mentioned.

According to 2019 data, insurance penetration is staggering at 3.76 per cent (Life: 2.82 per cent, Non-life: 0.94 per cent), compared to World average of 7.23 per cent (Life: 3.35 per cent and 3.88 per cent).

The report, using March 2019 data, said that the average FDI investments in the 23 private life insurer is only 35.5 per cent, 30 per cent for 21 non-life private insurers and 31.7 per cent for the 7-specialised health insurance.

“In our view, the increase in FDI limit in the insurance may receive ₹5,000-6,000 crore of foreign investment in the sector in the next 1-2 years and ₹15,000-16,000 crore in the next 5-years, apart from deeper product expertise and better underwriting skills,” the report said.

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