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Budget Impact In Insurance: FDI (Foreign Direct Investment) Cap May Rise By 74%

Deepti Shikha

| Updated: Dec 31, 2019 | Category: Finance & Accounting

BUDGET-IMPACT-IN-INSURANCE

In the Budget 2019-20 Finance Minister Niramala Sitharaman had announced that the government would “examine suggestions of further opening up of FDI” in a number of sectors, including insurance, along with 100% FDI in insurance intermediaries. At present, the stake of FDI is 49 Percent. The proposal by the Finance Ministry was to raise the cap to 100 percent. The finance ministry along with the Insurance Regulatory and Development Authority of India (IRDAI) agreed with the proposal of 74 percent. Views of stakeholders on this matter in a letter on 2nd December has called for suggestions on raising Foreign Direct Investment Limit (FDI) by 74%. In July budget, Finance Minister Niramala Sitharaman announced that the Government will examine suggestions from various stakeholders to further open up FDI in Insurance Sector.

Benefits of Rise of FDI in the insurance sector from 49% to 74%

“The move will bring in cost-effective capital for several insurers who are investing in technology and digital solutions, and who are wanting to expand the network to grow and make multi-fold impact towards building a long term and sustainable insurance sector,” said Ashish Vohra, ED & CEO, Reliance Nippon Life Insurance.

‘It is a progressive move as currently the burden of crop insurance is largely on GIC. With this move, niche players with a good understanding of the market and international players looking to purchase diversified global pools may enter the market which will lead to better risk-based price discoveries,” said Ashwin Parekh managing partner at Ashwin Parekh Advisory Services.

The benefits are:

  1. More Capital from Foreign Companies can benefit the common man as there will be more offers.
  2. Increased Competition in the market place will bring better offers.
  3. There will be money flow in the economy.
  4. There will be a Sensex hike and also the Forex Reserves will be maintained.
  5. As there will be strong competition, the market will become Consumer-friendly.
  6. More jobs will be created in the market.
  7. The higher FDI cap will immensely help the insurance sector which is extremely short on investments.

The government is seriously contemplating opening up the sector as it wants long-term stable money to be invested in the country. IRDAI is seeking inputs from industry people on government instructions and a report is expected to be submitted soon,” said a person involved in the discussions. “If all goes well, the government is planning to introduce this as part of the budget announcement and take a shortcut so that it gets Parliament’s nod as part of the Finance Bill.”

Also, Read: Types of Foreign Investment in India

Challenges in Implementation

  • Government and the Regulatory bodies will have to make sure that  the local business remains unaffected
  • Will have to check who will be having the control
  • Confusion in defining and structuring of Foreign Portfolio Investment
  • The reputation of foreign banks is known in the market, before trading with them the Government will have to set some limits.

“The experience with foreign banks has been very mediocre as they have unwound business in India after their global operations took a hit,” said one of the persons cited above. “And, since insurance, especially life, is a long-term liability and the government will have little power over foreign-owned entities, it has to be very careful before taking such a call.”

How It Will Be Implemented?

To enable the increased investment rate:

  • the Government will amend the Insurance Act,
  • Provisions will be changed relating to Indian Ownership,
  • Keep a check on the solvency of foreign firms so that local business remains unaffected
  • Look at long term contracts and
  • Foreign Portfolio Investments

Conclusion

Foreign Direct Investments in any sector needs a check. In the Insurance sector, it needs to be stricter as a common man’s money will be at stake. Before implementation of this CAP all the policies regarding ownership and control should be checked by the Regulatory Authority. Once foreign investors come in the market the Government will have no control over it. Implementation of this rule will bring strong completion in the market. The common man can benefit from this competition.

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Deepti Shikha

Deepti is a Law graduate with an avid interest in reading and very proficient in summarizing legal cases. She has enough experience in handling legal affairs of the company. In the initial days of her career, she has worked as a legal researcher and has 3+ years of experience.

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