The Union Cabinet has approved a proposal to amend the Insurance Act, 1938, in less than 6 weeks since the Finance Minister announced major financial sector reforms in the Budget for 2021-22, which has paved the way for increasing the foreign direct investment (FDI) limit in the sector from 49 percent to 74 percent.
A Bill to amend the Act is likely to be introduced in the ongoing Budget session of Parliament itself, government sources told The Indian Express. Raising the foreign investment limit in the insurance sector is expected to improve capital availability and foster competition in the sector.
The FDI limit hike will also develop the insurance industry as a big channel for generating durable funds for the creation of long-term assets and aid the process of economic development as India emerges out of the pandemic.
“I propose to amend the Insurance Act, 1938, to increase the permissible FDI limit from 49% to 74% in Insurance Companies and allow foreign ownership and control with safeguards,” Sitharaman had said in her Budget speech on February 1. Under the new structure, the majority of directors on the Board and key management persons would be resident Indians, with at least 50 percent of directors being independent directors, and a specified percentage of profits being retained as a general reserve.
The move is set to benefit the industry as it will help grow the market with a broader range of products at affordable prices. Insurance penetration currently stands at just 3.71 percent of the GDP in the country. Higher investments will help increase the penetration of products in an underserved market. It will also bring in global best practices, besides helping lower the cost of products due to greater competition.
Industry players said it would benefit small insurance players or the ones where the sponsors don’t have the ability to infuse more capital.
