Modi Govt Paving Way for Foreign Control of Insurance Sector?

New Delhi: The Narendra Modi government seems keen to allow foreign companies to take control of India’s insurance sector—as it reportedly plans to raise the foreign direct investment (FDI) cap in insurance companies to 74% from the 49% at present.

This move, likely to be announced in the February 2020 budget, has to be seen in the context of the Bharatiya Janata Party regime’s move to privatise the insurance sector and virtually wipe out public sector companies from both life and non-life/general insurance domains. These steps include the planned listing of Life Insurance Corporation (LIC), the country’s largest and most stable financial institution, as well as the merger of three public-sector general insurance companies—National General Insurance, United India Insurance and Oriental Insurance—which would be consolidated into one general insurance behemoth and then listed in the stock market. The government has already been planning stake sale in New India Assurance and GIC-Re, which were listed in 2017.

This FDI hike to 74% will give a massive advantage to the private sector insurance companies.

In fact, it is reported that the Modi government yet again plans to “take a shortcut” and introduce the FDI hike as part of the Finance Bill—so that it doesn’t face the hassle of approval from Rajya Sabha, where the Modi regime does not enjoy a majority.

In a December 2 letter, the Insurance Regulatory and Development Authority of India (IRDAI), sought suggestions and views of various stakeholders on the matter of raising overseas investment, acting upon government instructions. The IRDAI is expected to submit a report soon.

“The initial inputs gathered by the regulator centre around unwinding provisions related to Indian ownership in insurance firms, solvency of firms owned by foreign promoters, exercising long-term liability contracts on overseas owners and securing policy holders’ rights in case the insurer is foreign owned,” says the report.

On September 2, the government had increased the limit on FDI in insurance intermediaries to 100%.

In 2015, FDI in insurance companies had been hiked under the automatic route to 49% from the 26% allowed then — through the Insurance Laws (Amendment) Act 2015, which also mandated that ownership and control would remain with Indians.

Earlier, investment up to 49% required approval by the Foreign Investment Promotion Board (FIPB), which was scrapped by the Modi government in 2017.

After the 2015 amendment, several foreign investors hiked their stakes in Indian insurance joint ventures and many companies went in for initial public offerings. Some listed insurance companies include HDFC Life, ICICI Prudential, ICICI Lombard (general insurance) and SBI Life (joint venture with French multinational BNP Paribas).

In this year’s July Budget, finance minister Nirmala Sitharaman had announced government plans to further open up FDI in the insurance sector.

However, even some insiders involved in the discussions seem wary, especially regarding the long-term commitment of foreign companies.

“The experience with foreign banks has been very mediocre as they have unwound business in India after their global operations took a hit,” the Economic Times quoted an insider as saying. “And, since insurance, especially life, is a long-term liability and the government will have little power over foreign-owned entities, it has to be very careful before taking such a call.”

While the news report says the government is “keen” on Indian promoters retaining control even with just 26% stake — it seems highly unlikely.

Speaking with Newsclick, Amanullah Khan of All India Insurance Employees’ Association, which has been opposing FDI hike in the insurance business, said, “This move will place the country’s huge domestic savings in the hands of foreign capital, which is not going to help the Indian economy in any way.”

“As for the government saying control will remain with Indian promoters, there is no way that after investing 74%, the foreign capital would like to give away the control to Indians.”

Khan also pointed out that it is not clear whether this raised foreign capital limit includes or excludes portfolio investments — some listed companies already have substantial foreign portfolio investments, and if counted under the new FDI rule, it would take foreign investment way higher than the 74%.

“Some promoters like HDFC and ICICI have foreign capital much higher than 49%. It is estimated that HDFC has close to 74% foreign equity holding. It remains to be seen how the IRDAI and the government treat the cases in their insurance subsidiaries,” Khan said.

“The insurance companies that are listed in the stock markets also have substantial foreign portfolio investments. What treatment this will get also remains to be seen.

Moreover, “the increase of FDI from 26% to 49% did not result in capital expansion,” says Khan. “It gave an opportunity to the Indian partners to sell portion of their holdings to the foreign partner at a premium and make huge profits. The proposed hike to 74% will end with the same result.”

“The rate of growth of life insurance business before and after 20 years opening up of the sector (to private players) is identical,” says Khan. “It means that private and foreign participation has not expanded the market. The cake has remained the same but it is targeted by many companies.”

India has 24 life insurance companies and 34 general insurance firms as of now.

At present, however, only around 35-40 crore people in the country are insured through individual and group insurance businesses, which Khan says, is “significant performance viewed in the background of low household savings and lack of disposable incomes.”

But, with the second-largest population in the world, foreign companies would be surely drooling over the prospects of entering India, a potential market that is massive.