Indian Government Plans FDI Increase in Insurance Industry

After introducing the long awaited reforms allowing foreign direct investments (FDI) in multi-branded retail and aviation sectors, the Indian government is now looking at financial reforms that will change the face of the insurance industry.

The government is believed to be considering a complete makeover of the country's insurance laws that would end the monopoly enjoyed by state-owned Life Insurance Corp of India, shift control of the industry to the insurance regulator, and create a legal system to deal with any failure of insurers.

Prime Minister Manmohan Singh’s government is willing to walk the talk to help foreign investors in insurance by raising the FDI stake ceiling in insurance companies to 49% from the current 26%.

“FDI is needed to stoke the simmering fire of Indian GDP growth,” said Bundeep Singh Rangar. “Reforms that were held up under the previous Finance Minister now seem to be pushed through. The insurance industry alone needs a $10 billion infusion over the next five years to make it a healthy growth sector.”

India’s growth has been slowing, and hit a nine-year low of 5.3% in the March quarter, partly because of a global slowdown as well as weaker demand and investment activity at home. During April-May 2012 too, FDI in India declined by 59% year-on-year to $3.18 billion, reflecting the impact of slowing global economy.

The Insurance (Amendment) Bill that proposes to raise the FDI limit to 49% has been pending in Parliament after it was introduced in the Rajya Sabha (Upper House) in 2008 for lack of political consensus.

The probability of Parliament voting the Bill into law, however, remains uncertain given the strong opposition from both former ally Trinamool Congreess and the Left parties.

A commission headed by former Supreme Court judge B N Srikrishna studied possible reforms in the financial sector has suggested on Monday a merger of multiple financial regulatory agencies into one overarching authority that would have oversight of the capital market, insurance sector, pension funds and commodities futures trading—a proposal that, if accepted, would help consolidate the scattered regulation of financial products.

“A Super Financial Regulator could help end some confusion over policies and streamline conflicting agendas, “ said Bundeep Singh Rangar, Chairman of London-based advisory firm IndusView. “A bigger bureaucratic beast, however, would be a bad outcome. The government has been assailed by two years of corruption allegations; less bureaucracy is needed to bring more transparency”.

The commission was set up in March 2011 with the mandate of rewriting and harmonizing decades-old financial sector legislation, rules and regulations. The Financial Sector Legislative Reforms Commission (FSLRC) was required to submit its findings within two years. The commission has invited feedback on the approach paper, after which it will release its full report in March 2013.