Piloting the bill, Finance Minister Nirmala Sitharaman said hiking the FDI limit in the insurance sector will help insurers raise additional funds and tide over the financial problems

File photo of Union finance minister Nirmala Sitharaman. PTI

New Delhi: The Parliament on Monday passed a Bill to increase Foreign Direct Investment (FDI) limit in the insurance sector from 49 percent to 74 percent with the Lok Sabha approving the proposed law by a voice vote.

Piloting the bill, Finance Minister Nirmala Sitharaman said hiking the FDI limit in the insurance sector will help insurers raise additional funds and tide over the financial problems.

Today, many of the insurance companies are hard pressed to maintain solvency ratio of 150 percent as per the norms, she said while explaining the need for the amendment.

The Insurance (Amendment) Bill, 2021 was passed by Rajya Sabha last week. The Bill amends the Insurance Act, 1938.

The minister said the government will provide funds to public sector insurance companies but the private players will have to raise capital on their own and the Bill provides them headroom to raise capital.

Three out of the seven public sector insurers are below solvency margin but since they are in public sector, the government will infuse capital and their solvency margin will be taken care of, she said.

Observing that insurers are facing solvency related issues, she said, “if growth capital is hard to come by, there will be a stress situation. In order that the stress situation is not left unattended, we need to raise the FDI limit.”

The COVID-19 pandemic, Sitharaman said, has further added to the woes of the insurance companies.

“There is definitely a financial stress for raising money, especially for private sector insurance companies, which needs to maintain that solvency ratio,” she said. Solvency margin is the ratio of assets to liabilities.

Some of the life insurance companies are under stress and they need the money to come out of that, she added.

The minister further said the FDI limit was being raised on the recommendation of insurance regulator IRDAI which has done extensive consultations with the stakeholders.

FDI in the insurance sector, the minister said, has increased significantly after the government decided to raise the cap from 26 percent to 49 percent in 2015.

As much as Rs 26,000 crore has come as FDI in the insurance sector since 2015, she said, adding the asset under management (AUM) in this sector has grown by 76 percent during the last five years.

The number of insurance companies has increased from 53 to 68 and as many as 6 companies were listed on the stock exchanges in the last five years, she said.

Highlighting that insurance is a highly regulated sector she said, policyholders’ fund is going to be invested within India and that will not go out. She also emphasised that a portion of profit will also be retained in India.

Besides, the Bill stipulates that 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 a specified percentage of profits being retained as a general reserve.

She clarified that FDI is the upper limit and there is no compulsion that every foreign company has to increase it to 74 percent automatically.

FDI will not only bring in capital, but will also bring in greater competition, efficiency, better technology and enhance job opportunity in the country, she said.

The announcement for hiking FDI limit was made by the minister while presenting the Union Budget 2021-21 on February 1.

Currently, the permissible FDI limit in life and general insurance stands at 49 percent, with ownership and management control with Indians. Sitharaman assured the House that there will be no job loss in the public sector insurance space.

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