Foreign Investment in Insurance Hiked to 49%; Pension Opened Up

In the biggest slew of reform measures in years, the Government went ahead with long-pending financial sector reforms, risking the wrath of political allies and setting the stage for a political showdown at the upcoming Assembly polls in key States. The Cabinet on Thursday hiked the limit for foreign equity investment in insurance companies to 49 per cent. The wording is crucial; as there was no mention of foreign direct investment, the limit may combine FDI and FII investments.

It also paved the way for a major reform of the pension sector by clearing amendments to the Pension Bill and allowing foreign investments in the sector. That was not all. Official amendments to the outdated Companies Act, the largest single piece of legislation in the world, were also cleared, as was an amendment to the Forward Contracts Regulation Act allowing options. Amendments to the Competition Act were approved, though bank mergers were kept out of its purview.

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While India Inc welcomed the reforms push, political opposition to reforms, particularly in insurance, is bound to harden, especially because the Government ignored the views of the multi-party Parliamentary Standing Committee on Finance. However, the Government appeared to have kept some elbow room. This was evident when Finance Minister P. Chidambaram said: “We will sit, discuss and negotiate…. We will reach out to all political parties, especially the principal Opposition party, to get the reform Bills passed.”

He said there have been instances when Bills have been passed, even when the government was in the minority. This was particularly with reference to the lack of required numbers to get the Bills passed in the Rajya Sabha. Meanwhile, Chidambaram clarified that the new decision will not apply to Government-owned companies such as Life Insurance Corporation (LIC) and the five general insurance companies. “The benefit of this amendment will go to the private sector insurance companies which require huge amounts of capital and that capital will be facilitated with the increase in FDI to 49 per cent,” Chidambaram told reporters.

The state-owned general insurance companies and GIC will, however, be permitted to raise capital from the market to meet future requirements, provided the Government’s shareholding does not fall below 51 per cent at any point. To encourage health insurance, the capital requirement for a health insurance company is now proposed at Rs 50 crore (against Rs 100 crore for a general insurance company) to reduce entry barriers to a priority sector in the insurance space. The definition of the ‘health insurance business’ has been revised to clearly stipulate that health insurance policies would cover sickness benefits on account of domestic or international travel.

Further, the period during which a policy can be repudiated on any ground, including misstatement of facts, has been confined to three years from the commencement of the policy. Thus, no policy can be called in question on ground of misstatement after three years.

Pension Bill

The Cabinet also approved five official amendments to the Pension Fund Regulatory and Development Authority Bill, 2011. These official amendments are based on the recommendations of the Standing Committee on Finance. Among these, the provision on assured return is key. The provision says: “The subscriber seeking minimum assured returns will be allowed to opt for investing his funds in such schemes providing minimum assured returns as may be notified by the Authority.”

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The other provision is related to foreign investment limit. It says the foreign investment ceiling in the pension sector, at 26 per cent or such percentage as may be approved for the Insurance Sector, whichever is higher, may be incorporated in the present legislation. Asked whether these Bills will be brought for consideration and passage during the Winter Session, the Finance Minister said the time-table has to be approved by the Parliamentary Affairs Ministry.

News source: Hindu Business Line