Budget 2021: FDI cap hike in insurance may set cash registers ringing

The move to increase the FDI limit in the insurance sector will bring in a significant amount of capital. In addition, it augurs well for mid-sized firms and smaller players in need of capital to compete with the big boys. 

The large insurance companies are well capitalised and backed by very strong Indian partners, mostly banks and large non-banking players.

The finance minister on Monday proposed to amend the Insurance Act to increase FDI limit in the sector to 74 per cent from 49 per cent and allow foreign ownership and control with safeguards. Under the new structure, majority of directors and key management persons have to be Indian residents. 

And, a specified percentage of profits has to be retained as general reserve. Until now, the law mandated that an Indian insurance company has to be Indian-owned and controlled.

Deepak Parekh, chairman, HDFC, said, “It’s a very good move to get more foreign money into the country. Also, foreign institutional investors (FII) are keen on India. Large foreign insurance firms are willing to take majority stake in Indian firms. Japanese companies that I have met in the past, both life and general, were waiting on the fence for an opportunity to take more than 50 per cent stake in Indian insurers.”

“Some Indian promoters of insurance firms want to sell their stake. Large insurers may not want to sell a majority stake but smaller ones may want to exit or have a smaller stake. Also, some institutional promoters may want to stick to banking. And, we have seen many banks opening insurance companies. The interest of a bank is just to earn money on distribution so it can monetise some equity holdings to the foreign partners,” he added.

Increasing the FDI limit has been one of the long-standing demands of the insurance sector for several years. Back in 2015, the government had increased the FDI limit in the sector from 26 per cent to 49 per cent. 

“This should catalyse the long-term growth of the industry,” said Bhargav Dasgupta, managing director (MD) & chief executive officer (CEO), ICICI Lombard General Insurance.

“FDI cap increase will likely benefit smaller and mid-sized players. Both strategic and private equity investors can invest and capital infusion will allow these companies to compete with larger players,” said Sandeep Ghosh, Partner, insurance, EY.

With increasing demand for insurance, post-pandemic, capital infusion will be key to growth of a number of companies. In this scenario, experts said, the foreign partner will now have an incentive to buy out its Indian counterpart and infuse cash.

“It will help insurance companies raise funds to ensure their solvency is maintained in line with growing business needs. We may also see increase in mergers and acquisitions (M&As) in the sector, paving the way for PE funds to enter the space,” said Anuj Mathur, MD and CEO, Canara HSBC OBC Life Insurance.

Furthermore, not only will this enhance technical knowhow of the insurance industry but also improve risk management practices. 

Experts say, this will overhaul the insurance sector completely, 20 years after it was opened up to private players. Previously, the government allowed 100 per cent FDI in insurance intermediaries.

Meanwhile, the finance minister, in her Budget speech, also said, the government will pave the way for the initial public offering of state-owned Life Insurance Corporation in 2021-22. For this, the requisite amendments will be brought in during the current Parliament session itself.