A politically vulnerable Congress-led United Progressive Alliance (UPA) is likely to drop the proposal for easier foreign direct investment (FDI) norms in insurance and pension funds.
Accordingly, the proposal to enhance FDI in insurance joint ventures to 49% is likely to be dropped, and the government, as demanded by the opposition, may cap the FDI ceiling in pension funds to 26% and guarantee assured returns, an official associated with the developments said, requesting anonymity.
The political opposition to the liberalization sought by the UPA was threatening to derail a key and long pending insurance and pension fund reform initiative.
The parliamentary standing committee, headed by former finance minister Yashwant Sinha, had recommended that FDI in pension be capped at 26% in the legislation itself and assured returns be given to those individuals who are willing to park their entire corpus in government securities.
The government is expected to move amendments to the Insurance Laws (Amendment) Bill, 2008, and the Pension Fund Regulatory and Development Authority Bill (PFRDA), 2011, to cap FDI at 26% in the current budget session of Parliament. With FDI being capped at 26% in both these sectors, the government is hopeful that it will be able to push through these financial sector Bills.
“Except the whole issue of FDI, there is no other major problem with the insurance Bill. Given the political compulsions, FDI will be 26%. There is no other choice. It is a political call,” said a top finance ministry official, who declined to be identified.
India has 24 life insurance companies and an equal number of general insurance companies.
“The biggest clause in the insurance amendment Bill is 49% FDI. Maintaining the ceiling at 26% will send a wrong signal to investors”, said Ravi Trivedy, partner at KPMG Advisory Services. “As it is, the life insurance industry is really struggling.”
Finance minister Pranab Mukherjee in his budget speech on Friday had said the government will push the insurance amendment, PFRDA and the Banking Laws Amendment Bill, which will pave the way for the issue of banking licences by the Reserve bank of India by the end of the year, in the current parliamentary session.
“Many new foreign companies that want to enter these segments (insurance and pension funds) in the Indian financial services market may (now) review their decision,” said Robin Roy, associate director at audit and consulting firm PricewaterhouseCoopers. “The biggest challenge for the insurance industry is capital. Foreign partners are willing to bring in more funds, but if the ceiling is not raised, that will not happen. Insurance companies will then have to look to either coughing up more capital or inducting another domestic partner to meet the evolving capital requirements.”
The standing committee of finance, in its report on the proposed insurance law, had observed that given the present global economic scenario, any further hike in FDI may not be in the interest of the Indian insurance industry. The committee had instead suggested alternative routes of tapping the market for raising the required capital for insurance companies, such as initial public offers, and through fund raising on the lines of those done by banks.
As per the projections of the Insurance Regulatory and Development Authority (Irda), the life insurance industry will need capital of at least Rs.40,000 crore to achieve an insurance
penetration level of 8% of gross domestic product and around Rs.66,000 crore for the
insurance sector as a whole in the next five years.
Besides FDI, the insurance Bill has provisions that will provide greater flexibility to Irda by removing some clauses from the statute and placing it under regulatory supervision.
“Once the Bill is passed, Irda will have more flexibility in deciding agent structures and agent commissions,” said P. Nandagopal, chief executive officer, IndiaFirst Life Insurance Co. Ltd.
The PFRDA Bill aims at giving a statutory status to the pension fund regulator and will empower PFRDA to regulate the National Pension Scheme and introduce regulations to reform it.
Though the government had initially decided not to accept the recommendation of the standing committee to include the FDI provision in the legislation and cap it at 26%, it agreed to include it to garner the requisite numbers to pass the Bill.
But the draft law could not be passed in the winter session of Parliament after Trinamool Congress leader Mamata Banerjee demanded the inclusion of the assured returns clause.
Sinha, in a recent interview, had said that the government has agreed to include the main recommendations of the standing committee on the PFRDA Bill and the Bharatiya Janata Party would support the Bill after the changes are incorporated.
The Bill, which will bring PFRDA on par with other financial sector regulators, is the UPA’s second attempt at putting in place a statutory framework for the sector.
Previously, the UPA had failed to get passage for the pension Bill in 2005 as the Left parties, which were its allies at the time, had refused to back the legislation.