Cabinet nod for hiking FDI cap in insurance, pension

Carrying forward the big-ticket reforms agenda, the government on Thursday decided to move ahead with its proposal to hike foreign investment ceiling in the insurance sector to 49 per cent from the present 26 per cent.

A decision in this regard was taken by the Union Cabinet headed by Prime Minister Manmohan Singh. "The benefit of this amendment will go to the private sector insurance companies which require huge amount of capital and that capital will be facilitated with increase in FDI to 49 per cent," Finance Minister P Chidambaram told reporters.

The Minister also clarified that state-run insurance companies will remain in the public sector. The government also gave green signal to foreign investment in pension funds and said the FDI limit could go up 49 per cent in line with cap in the insurance sector.

With the Cabinet approving the proposal, the Insurance Laws (Amendment) Bill is likely to be taken up by Parliament for passage in the forthcoming Winter Session.

The Bill introduced in Rajya Sabha in December 2008 proposes to increase the foreign direct investment (FDI) limit in the insurance sector to 49 per cent.

However, the Standing Committee on Finance in its report on the Bill had rejected the proposal to hike the FDI cap in the insurance sector to 49 per cent, saying this may not have the desired effect and could expose the economy to global vulnerability.

The panel, headed by senior BJP leader Yashwant Sinha, though had agreed with the need to bring in comprehensive changes in the archaic laws governing the insurance sector.

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The Insurance sector was opened up for private sector in 2000 after the enactment of the Insurance Regulatory and Development Authority Act, 1999 (IRDA Act, 1999).

This Act permitted foreign shareholding in insurance companies to the extent of 26 per cent with an aim to provide better insurance coverage and to augment the flow of long term resources for financing infrastructure.

The industry has been demanding for long to increase the FDI limit for adequate funds for expansion of the sector. IRDA Chairman J Hari Narayan recently favoured up to 49 per cent foreign investment in the sector.

Allowing FDI forms a part of the amendments to Pension Fund Regulatory and Development Authority (PFRDA) Bill, which was approved by the Union Cabinet.

"The FDI limit in pension will follow FDI limit in insurance. If insurance bill passes with 49 per cent, pension will also be 49 per cent," Finance Minister P Chidambaram told reporters.

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However, it agreed to help in passage of the Companies Bill. The Standing Committee twice vetted the bill, a rarity in the Parliamentary process in India.

PFRDA chairman Yogesh Agarwal said he will be happy with 26 per cent FDI in the pension sector. However, if it is to become 49 per cent in line with the insurance sector he will welcome the move even more. He said lots of foreign interests were shown from the US and Europe in the pension sector in India.

Besides opening up the pension sector, PFRDA bill gives statutory powers to the interim regulator, constituted through an executive order in 2003.

FDI reforms measures, cleared by the Cabinet last month, were all executive decisions. However, the reform proposals cleared today are bills, which will require opposition's help to pass them.