LS nod for Bill to increase FDI in insurance
Context: The Lok Sabha passed the Insurance (Amendment) Bill, 2021 which seeks to raise the limit for Foreign Direct Investment (FDI) in insurance companies from 49% to 74%.
Need:
- The move was aimed at solving some of the long-term capital availability issues in the insurance sector which was a capital intensive industry.
- The high solvency fund ratio in the sector has led to liquidity stress in the sector and the Bill will address that stress.
- Government can help public sector firms but private companies will have to find ways of raising money.
Safeguards:
- The banking and insurance industry had been designated as strategic sectors and that the 74% cap is just a limit posed on the FDI.
- The Bill has safeguards that some of the profit has to be invested within the country.
Summary of the Bill:
The Bill amends the Insurance Act, 1938. The Act provides the framework for functioning of insurance businesses and regulates the relationship between an insurer, its policyholders, its shareholders, and the regulator.
- Foreign investment:
- The Act allows foreign investors to hold up to 49% of the capital in an Indian insurance company, which must be owned and controlled by an Indian entity.
- The Bill increases the limit on foreign investment in an Indian insurance company from 49% to 74%, and removes restrictions on ownership and control.
- However, such foreign investment may be subject to additional conditions as prescribed by the central government.
- Investment of assets:
- 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 Act specifies in an explanation 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. The Bill removes this explanation.
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