India hikes foreign investment cap in insurance to 74%

THE Indian government on Monday proposed to increase foreign direct investment (FDI) limit in the insurance sector to 74 percent, a move aimed at attracting greater overseas capital inflows to help enhance insurance penetration in the country.

In the first paperless Federal Budget, Finance Minister Nirmala Sitharaman said under the new structure, the majority of directors on the board and key management persons would be resident Indians, with at least 50 percent of directors being independent directors, and specified percentage of profits being retained as a general reserve.

“I propose to amend the Insurance Act, 1938 to increase the permissible FDI limit from 49 percent to 74 percent in insurance companies and allow foreign ownership and control with safeguards,” she said while presenting the Budget 2021-22.

She also said that for investor protection, an investor charter would be introduced as a right of all financial investors across all financial products.

It was in 2015 when the government hiked the FDI cap in the insurance sector from 26 percent to 49 percent.

Life insurance penetration in the country is 3.6 percent of the GDP, way below the global average of 7.13 percent, and in case of general insurance, it is even worse at 0.94 percent of GDP, as against the world average of 2.88 percent.

The government has earlier allowed 100 percent foreign direct investment in insurance intermediaries. Intermediary services include insurance brokers, reinsurance brokers, insurance consultants, corporate agents, third party administrators, surveyors and loss assessors.

Commenting on the proposal to hike FDI to 74 percent, Russell Gaitonde, Partner, Deloitte India, said the decision will help attract greater foreign investment and strengthen the sector.

Aatur Thakkar co-founder and Director at Alliance Insurance said an additional infusion of capital will enable growth and help insurance reach the last mile at the grass-root level. ‘This one move will help create more jobs for youth which is the need of the hour,’ Thakkar added.

Further, Shailaja Lall, Partner, Shardul Amarchand Mangaldas & Co, said that a more liberal FDI policy will certainly attract higher amounts of foreign capital, which will aid in increasing insurance penetration in India.

‘It will also provide an impetus to the insurance industry to scale up and build more digital and infrastructure capabilities in the post-pandemic era,’ Lall added.

Commenting on the budget, Radhika Rao, Economist, DBS Bank, Singapore said: ‘The FY22 budget prioritized investments over consolidation, evidenced by a strong supply-side push towards infrastructure, healthcare, lift in FDI cap, farm sector and formation of specialised institutions, among others.’

‘A sharp jump in capital expenditure points to a firm medium-term push, but the onus of a delay in consolidation notwithstanding a cyclical recovery falls squarely on the ability to finance the gap. For now, the revenue burden is squarely on market borrowings, disinvestment and indirect taxes (import tariffs and cess). This is also reflected in the divergent impact on markets, as bond markets fret on the higher issuance while equities cheer growth-oriented announcements and no outright increase in direct/indirect taxes.’

Meanwhile, seeking to further improve the ease of doing business, Sitharaman said NRIs will be allowed to set up one person companies, definition of small companies will be revised and various provisions of the Limited Liability Partnership (LLP) Act will be decriminalized.

The proposed relaxations to rules governing One Person Companies (OPCs) are expected to benefit startups and innovators. Dedicating

a separate portion of her 2021-22 Budget speech to company matters, Sitharaman said in the next fiscal year, MCA 21 portal will be driven by data analytics, artificial intelligence and machine learning features as well as have additional modules such as for e-adjudication and compliance management.

MCA 21 portal is used for submitting various documents as part of compliance requirements under the companies law.

Sitharaman, who is also in charge of the corporate affairs ministry, said the decriminalizing of the procedural and technical compoundable offences under the Companies Act, 2013, is now complete, and that the next step is to take up decriminalization of the LLP Act, 2008.

Further, she proposed revising the definition of small companies under the Companies Act, 2013 by increasing their thresholds for paid-up capital from ‘not exceeding $68,402’ to ‘not exceeding $2,73,610’ and turnover from ‘not exceeding ‘$2,73,610’ to ‘not exceeding $2.74m’.

‘This will benefit more than 200,000 companies in easing their compliance requirements,’ she said. Regarding OPCs, the minister said she is proposing to incentivize the incorporation of such companies.

OPCs will be allowed to ‘grow without any restrictions on paid up capital and turnover, allowing their conversion into any other type of company at any time, reducing the residency limit for an Indian citizen to set up an OPC from 182 days to 120 days and also allow Non Resident Indians (NRIs) to incorporate OPCs in India’. OPCs, which have lesser compliance requirements, can be set up with one member.

Further, the minister said the National Company Law Tribunal (NCLT) framework will be strengthened, e-courts system shall be implemented and alternate methods of debt resolution and special framework for MSMEs shall be introduced.