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Insurance regulator pitches for differential FDI caps

Differential caps for Foreign Direct Investment (FDI) in the insurance sector could be on the agenda if the government and the Left parties are able to arrive at an agreement.

As part of the comprehensive changes to the insurance law, IRDA is understood to have mooted varying the percentage of foreign participation in the paid-up capital of an Indian insurance company depending on the category of the company.

This means that a standalone health insurance company could have an FDI cap that is different from say, a general insurance firm.

The insurance regulator is also reckoned to have made out a case to the government for varying the capital requirements for different segments of the insurance industry.

It has mooted a lower minimum capital of Rs 50 crore for standalone health insurance companies. This is in line with the recommendations of the working group set up for this purpose.

Preliminary talks have been held on the proposed changes to the Insurance Act. Right now, the foreign equity stake in domestic insurance companies is capped at 26%.

Although the government had, in the ‘04-05 budget, proposed hiking the FDI limit to 49% as part of the reforms in the domestic insurance industry, the announcement has not been implemented due to Left opposition.

An enhancement in the ceiling will require the Parliament’s nod, as the existing law says that the FDI limit shall not exceed 26%.

The KP Narasimhan (KPN) committee, constituted to recommend comprehensive changes to the insurance law, has made out a case for making changes in the definition of “Indian Insurance Company” in the existing legislation (Insurance Act, 1938).

The idea is to allow the central government to prescribe a ceiling instead of having it as part of the legislation. A ceiling can be prescribed through a notification.

“The committee deliberated at length on the pros and cons of stipulating, in specific terms, the percentage of foreign participation in the paid-up equity in Clause (b) of the definition of the Indian insurance company as has been the case now, but has refrained from so specifying (such as a percentage not exceeding 49%), leaving it to be addressed by the government in view of the sensitivity of the matter”, stated the report submitted in July ‘05.

IRDA, which has given its comments on the KP Narasimhan committee, is understood to have backed the KPN committee’s recommendations on giving flexibility to the government to prescribe FDI caps.

At the same time, the regulator reckons that the FDI caps need not be uniform across the industry and could vary depending on the class of the insurance company.

The KPN committee has recommended a paid-up capital of Rs 100 crore for firms getting into the life and general insurance business. It has also suggested sweeping changes in the statutory framework of the Insurance Act.

These include altering the provisions relating to investments, shareholder funds and policy holders funds, sufficiency of assets, insurance surveyors and the Tariff Advisory Committee.

IRDA has also pitched for separately defining a health insurance company to enable the formation of standalone health insurance companies.

The regulator has so far approved the setting up of just one stand alone health insurance company in India — Star Health and Allied Insurance Company with 26% (FDI).

Industry experts reckon that the country requires standalone insurance companies, considering that only 3% of the population is covered by health insurance.

Domestic insurance companies will need an infusion of capital to sustain their business growth. Capital is indeed an issue for insurance companies, considering that it takes nearly six to seven years to break even in the industry. Only those companies with a healthy capital base will be able to last the course.



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