The government has decided to introduce the Insurance Laws (Amendment) Bill 2008 in the upcoming budget session of Parliament in its present form which allows 49% foreign investment in the insurance sector, without a carve out for portfolio investors.
“There will be no compromise now. We will introduce the Insurance Bill in its present format. The UPA is hopeful that key allies will come together as in the case of FDI in retail,” said a senior cabinet rank minister. The move will also pave way for 49% foreign investment in the pension sector.
Earlier, the government was in discussion with the BJP to work out a compromise formula for smooth facilitation of the Insurance Bill.
The BJP was opposed to increasing the foreign investment limit in the sector to 49%, but according to sources agreed to a compromise solution wherein foreign direct investment (FDI) limit is retained at 26% but additional 23% is allowed for foreign institutional investors.
However, after it was able to get two bills-Banking Laws (Amendment) Bill and the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011 – passed in the winter session of the Parliament, the government is hopeful that it will now manage to steer through the Insurance Bill, as cleared by cabinet in October last year.
“We will allow 49% foreign investment in insurance sector. It will be for the companies to decide whether they want it through direct investment or the FII route,” said the minister quoted earlier.
The government has veered towards the view that a 23% FII quota would restrict the flexibility of the insurance companies to structure their shareholding. A finance ministry official confirmed that they have not been asked to go make any changes in the Insurance Laws (Amendment) Bill to dilute the proposal to increase foreign investment limit to 49%.
“Politically there were some discussions but nothing officially was conveyed. If the government wants to introduce the Insurance Bill in the budget session it will be too late to make any changes now,” he added.
The Insurance Laws (amendment) Bill, 2008 had provided for an increase in foreign investment limit to 49% from 26%. However, the standing committee on finance headed by Yashwant Sinha did not favour the hike in FDI ceiling, indicating wide opposition to this increase in the limit.
After considering the recommendations, the union cabinet in October decided to go with 49% foreign investment limit and sought to build political consensus around that.
However, the passage may not be as easy as government seems to suggest. In December 2012, the government had to drop the Forward Contract Clause in the Banking Laws (Amendment) Bill, which would have allowed banks to enter commodity trading.