In a move that could pave the way for huge investment and growth in the insurance sector, Finance Minister Nirmala Sitharaman on Monday proposed increase in the foreign direct investment (FDI) limit, while also allowing foreign entities to own insurance companies in the country subject to conditions.
“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 finance minister announced in her budget speech.
Under the new structure proposed in the Budget, the majority of directors on the board of an insurance company and key management persons would have to be resident Indians, with at least 50 per cent of directors being independent directors, and specified percentage of profits will have to be retained as general reserve.
Last year, the government had allowed 100 per cent FDI in insurance intermediaries, including insurance brokers, consultants, third party administrators and surveyors.
The latest move to raise FDI limit in insurance companies will help increase avenues to bring in capital inflows, says Shanai Ghosh, CEO of Edelweiss General Insurance.
“This move will help strengthen the sector and also help further penetration of insurance in the country, which still is far behind the world average,” said Ghosh.
Insurance awareness and penetration in India has risen in recent years, more recently due to the COVID-19 pandemic. However, it still remains low (premium as a percentage of GDP is at around 3.7 per cent) compared to more developed economies. As the sector grows, companies will need more capital, and this Budget has looked to addressed this by opening the door wider for foreign companies.
Increasing the FDI limit “will provide an immediate backstop in terms of capital for growth,” said Niraj Kumar, chief investment officer at Future Generali India Life Insurance Company.
A more liberal FDI policy will certainly attract higher amounts of foreign capital, which will aid in increasing insurance penetration in India, agreed Shailaja Lall, partner at Shardul Amarchand Mangaldas.
“It will also provide an impetus to the insurance industry to scale up and build more digital and infrastructure capabilities in the post pandemic era,” said Lall.
Bhargav Dasgupta, CEO of ICICI Lombard General Insurance company said that increased allocation towards healthcare and infrastructure, and the voluntary scrappage policy for automobiles will also have a positive impact on the insurance industry.
Shares of insurance companies jumped following the finance minister’s announcement. ICICI Lombard General Insurance rose 3.8 per cent, HDFC Life Insurance was also up 3.1 per cent, ICICI Prudential Life Insurance rose 1.9 per cent and SBI Life Insurance gained 1.2 per cent. General Insurance Corp of India surged more than 5 per cent. The broader BSE Sensex was up 5 per cent post the Budget.