Rajya Sabha Passes Bill To Increase Foreign Direct Investment In Indian Insurance Sector To 74%

The Bill to amend the Insurance Act, 1938 was introduced in the House by the Minister of Corporate Affairs, Nirmala Sitharaman, on March 15, 2021.

As per the Statement of Object annexed to the Bill,

"In order to achieve the objective of Government's Foreign Direct Investment Policy of supplementing domestic long-term capital, technology and skills for the growth of the economy and the insurance sector, and thereby enhance insurance penetration and social protection, it has been decided to raise the limit of foreign investment in Indian insurance companies from the existing 49 per cent. to 74 per cent."

It may be noted that the foreign investment in insurance sector was first permitted in the year 2000 up to 26%. Subsequently, vide an Amendment Act of 2015, this limit was raised to 49% of the paid-up equity capital of such company, which is Indian owned and controlled.

The instant Bill removes such restrictions on ownership and control. However, such foreign investment may be subject to additional conditions as may be prescribed by the Central Government.

The Bill also proposes to omit explanation appended to Section 27(7) of the principal Act.

Presently, the Act requires insurers to hold a minimum investment in assets which would be sufficient to clear their insurance claim liabilities. If the insurer is incorporated or domiciled outside India, such assets must be held in India in a trust and vested with trustees who must be residents of India.

The explanation states that this will also apply to an insurer incorporated in India, in which at least: (i) 33% capital is owned by investors domiciled outside India, or (ii) 33% of the members of the governing body are domiciled outside India.

Parliamentary Debate

During the debate, BJP MP Arun Singh expressed the need for inviting more investments and newer technology in the insurance sector, given the growing needs and advancing lifestyle of the citizens.

However, the Bill was strongly opposed by the Opposition members as they apprehended that privatization of the insurance sector will affect self-sustenance of the Indian economy and put the depositors' money at risk.

The members said that the Bill puts Indian money at the disposal of money-minting foreign companies and recommended that it should be sent to the Parliamentary Standing Committee for scrutiny.

"Insurance is both a strategic & a social sector, having implications on common citizens. When a law has to be enacted, it must go through Parliamentary scrutiny. When that is bypassed, conflict arises," remarked Congress MP Anand Sharma during the debate.

He also claimed that an understanding was reached between the Government and the Opposition MPs that only 49% FDI will be permitted in insurance sectors with safeguards like Indian ownership & control. However, the Bill violates this national consensus.

Other issues raised during the debate:

• The present actual share of FDI in insurance sector is less than the current limit of 49%. Hence, there is no justification for increasing the limit to 74% when in 5 years, the target of 49% has not been achieved.
• Infusion of market funds in the insurance sector at at a time when financial institutions like DHFL, Yes Bank etc. have collapsed is not viable.
• The Bill does not contemplate a provision for preventing financially weak foreign companies from entering the Indian insurance sector.
• Many Indian insurance companies are already in Join Venture with foreign companies. Hence, the Government's claim that foreign investment is need for bringing newer technology to the country is not substantiated.
• Provision of the Bill allowing foreign ownership contemplates that the Government may prescribe certain safeguards. However, the provision is very vague and there is no specific mention as to what steps will be taken by the Government to ensure that money of common man is not misused.

Responding to the debate, Union Minister Nirmala Sitharaman assured the house that no company will be compelled to raise foreign investment. She stated that the proposed upper upper limit is not mandatory.

She also informed the House that the money deposited by Indian depositors can be invested by these foreign companies in India only and they will not be permitted to take this money outside the country.

She claimed that the Bill will increase competition in the sector and will in turn attract affordable schemes for middle class people.

On the issue of privatization, she emphasized that about half of market share of the Indian insurance sector is already held by private companies. She revealed, the public sector insurance market share is merely 38.78%, whereas private sector enjoys 48.03% of the market share.

Click Here To Download Bill

Read Bill