FDI cap hike to raise insurance penetration

Implementation of the Budget proposal to raise the foreign direct investment (FDI) limit in the insurance sector to 74 per cent will help attract overseas capital and enhance insurance penetration in the country, according to experts.

Deloitte India Partner and Financial Services Industry Leader Sanjoy Datta said the announcement to raise the FDI cap in the sector was a much-awaited move by the government. It is in direct recognition of the requirement for significant capital inflows to provide adequate levels of insurance cover to the population, he added.

The proposed increase in FDI would also likely result in increased value for customers by way of more product options at reduced costs, he said.

“We see a possibility of select foreign partners in existing insurance JV’s (joint venture) seeking to increase ownership levels, attractive valuation for exits for existing investors (domestic and foreign) as well as the entry of new investors who prefer majority equity holding in the entity,” he said.

Finance Minister Nirmala Sitharaman in her Budget Speech 2021 proposed 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.

Shardul Amarchand Mangaldas & Co. Partner Shailaja Lall said a more liberal FDI policy will certainly attract higher amounts of foreign capital, which will aid in increasing insurance penetration in India.

“While this is a welcome move by the government, foreign investors will certainly view this development with ‘a pinch of salt’ and like to take a cautious approach. Much will depend upon the fine print of the conditions being proposed,” Lall said.

She said that once there is more clarity, it will need to be seen as to how many foreign investors are willing to infuse capital, without the ability to control the board.

“Any conditionality and regulatory approvals attached to payment of dividends to foreign investors may add another level of complexity. It is possible that the Irdai may also prescribe certain conditions to safeguard policyholder moneys,” she said.