The Cabinet on Wednesday cleared amendments to the Insurance Act to pave the way for raising the foreign direct investment (FDI) limit up to 74 per cent from 49 per cent, as proposed in the Budget for FY22. The amendments will have to be ratified by Parliament to take effect.
It also approved the Pradhan Mantri Swasthya Suraksha Nidhi (PMSSN) as a single non-lapsable reserve fund created from the share of health in the health and education cess proceeds. This fund will be utilised for the health ministry’s flagship schemes, including Ayushman Bharat, National Health Mission and Pradhan Mantri Swasthya Suraksha Yojana.
The proposal to hike the FDI limit in insurance is expected to open up new avenues of funding at a time when some players are struggling with solvency issues. The move, along with the decision to launch the IPO of LIC and privatise one of the government-owned general insurers, would bring more efficiency to the market, analysts say.
Apart from drawing new foreign investors, the hike in FDI limit will also allow foreign partners, currently in joint ventures, to raise their stake and control the Indian insurance firms. Over a dozen insurance companies in India are formed of joint ventures between domestic and foreign partners, including ICICI Prudential, HDFC Standard Life, Bajaj Allianz and Star Union Daiichi Life Insurance.
Many of the existing domestic partners of private-sector insurance companies are unable to infuse fresh capital into their firms; higher FDI limit could help these firms to bolster their capital base and business.
Against the minimum regulatory requirement of 1.5 times, National Insurance’s solvency ratio languished at just 0.02 at the end of FY20, while United India’s hit 0.3 and Oriental Insurance’s 0.92. Thanks to initial infusion this fiscal, National’s solvency improved to 0.2 time at the end of September 2020 – still way below the requirement. United’s solvency rose a tad to 0.7 as of June 2020. Sensing the insurers’ urgent need, the Cabinet in July 2020 approved higher capital (Rs 9,950 crore) for this fiscal than the budgetary allocation of Rs 6,950 crore.
The move to raise the FDI limit will also help improve insurance penetration and herald consolidation in the sector, analysts have said. Domestic insurers would also gain from the sharing of best practices of risk management.
While presenting the Budget 2021-22, finance minister Nirmala Sitharaman had proposed to amend the Insurance Act, 1938, to increase the FDI limit in insurance companies and “allow foreign ownership and control with safeguards”.
Under the new structure (for building in safeguards), the majority of directors on the board and key management persons would have to be resident Indians, with at least half of directors being independent ones, and specified percentage of profits being retained as general reserve.
The life insurance sector in India was liberalised in 2000 after the government had allowed foreign companies to own up to 26 per cent in domestic insurers. The sector was opened up further in 2014 when the FDI limit was hiked to 49 per cent.
As for the Pradhan Mantri Swasthya Suraksha Nidhi, it will be a non-lapsable reserve fund for health in the Public Account. It can also be tapped to roll out various programmes under the National Health Mission and also for emergency and disaster preparedness.
In the Budget for 2018-19, the government had announced the replacement of a three per cent education cess by a four per cent health and education cess. Analysts had estimated a mop-up of Rs 11,000 crore a year more through this additional one per cent cess.