The bill to provide an amendment to the Insurance Act, 1938 was passed in the Rajya Sabha on March 18, which raises the limit of foreign direct investment in the sector from the existing 49% to 74%. This means that foreign companies can now directly have a majority stake in their local subsidiaries or joint ventures.
The passage of this bill is a stepping stone towards achieving one of the announcements of Finance Minister Nirmala Sitharaman in the Union Budget this year.
"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", she said on February 1.
The govt has said that these changes will help in improving market penetration and skills in the Indian insurance sector, and to achieve the goals of the foreign direct investment policy by supplementing domestic long-term capital.
The statement of objects and reasons in the bill states,
"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."
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What are the safeguards?
The Finance Minister in her budget speech outlined the safeguards provided to policyholders with these amendments. These safeguards would pertain to directorship and retaining of profit.
"Under the new structure, the majority of Directors on the Board and key management persons would be resident Indians, with at least 50% of Directors being Independent Directors, and specified percentage of profits being retained as general reserve", she said in her budget.
Her budgetary speech can be found here.
In her remarks in the Rajya Sabha, Sitharaman elaborated on these provisions. She said that the majority of directors on an insurance company's board (which she calls 'key management persons') would be resident Indians would ensure that each and every law of the country would be applicable to them, and that keeping the profits as general reserve would not be allowed to leave the country.
She also defended against criticism that increasing the limit of foreign direct investment in the country would infringe on the "sovereignty" of the sector. She recalled the number of players in the sector in India stating that there are only seven public sector insurers, but 61 private sector insurers in the sector across the verticals of life, general, health and agricultural insurance. In fact, the last sector - agricultural insurance - has zero private players, she told the House.
The private sector in insurance also directly employees more people than the public sector (excluding insurance agents) - 2,67,000 employees versus the latter's 1,65,000.
She stressed that the move would supplement Indian capital in the sector, which she said is not sufficient, and which would help the sector grow.
Her remarks can be seen in the video below.
However, many members of the opposition were not convinced and staged a walkout while voting was taking place in the House. This was happening over their demand to send the bill to a standing committee. This can be seen in the voting of the bill below.
The text of the bill as passed by Rajya Sabha can be found here.