The FDI in insurance sector has been raised from 26% to 49%. This proposal had been pending since 2 years.
This proposal first came in 1998.
The insurance sector was thrown open to private players in the year 2000.
This move will be welcomed globally and would increase the investments in the country.
This is something which a lot of companies outside India were waiting to happen.
However, we have to be cautious seeing the current market situation and economic downturn. We should not be too ambitious.
First 26% is through the automatic route and next upto 49% is through the FIPB route.
FIPB has much diverse set of people sitting there and it is possible to take a wholesome view.
Companies would have preferred to go through non FIPB route completely. And Companies also wanted to get the option to have controlling stake in terms of the Board of Directors and things like that. But the government is not willing to delegate such powers.
It is the fund which foreign companies bring into India, is of special interest
The previously set 26% cap had not attracted many companies.
The East Asian crisis, 2007 economic crisis and European Union crisis have exposed the whole world to the kind of volatility and risks that exist in the financial sector.
The kind of reforms that had to be undertaken, post the crisis, were actually not undertaken.
The insurance cap will also apply to the pension sector. Hence there are risks associated with it.
India performed reasonably well during the crisis because of the good regulatory structures in place.
India, with 3.2% of the GDP, has one of the smallest penetration of insurance in the world.
This proposed increase would affect the general insurance public sector companies. But some argue by saying that the problem of the public sector companies lies in the underwritten policies.
Insurance funds are the long term funds which bring in foreign funds and provide capital to the infrastructure sector. Infrastructure sector really needs the fund for a longer period of time.
Insurance is the sector where there is a huge solvency requirement.
Insurance funds are basically subscriber funds.
We should look for a more competitive environment which requires a level playing field for both Public Sector and Private Sector companies.
There are also chances of Indian market being exposed to the risks of Global financial market due to opening up of the sector.