Union Budget 2021: Hike in insurance FDI limit to draw fresh capital

The insurance sector received a boost after finance minister Nirmala Sitharaman proposed to increase the permissible foreign direct investment (FDI) limit in insurance companies to 74% from 49%. Market participants said the move will attract fresh capital, which, in turn, will increase the penetration of insurance.

The Budget also proposes to allow foreign ownership and control with safeguards. “Under the new structure, the majority of directors on the board and key management persons would be resident Indians, with at least 50% of directors being independent directors, and specified percentage of profits being retained as general reserve,” Sitharaman said in the Budget speech.

Decoding Finance Minister Nirmala Sitharaman’s Union Budget 2021

Joydeep K Roy, partner & leader – insurance, PwC India, said an increase of FDI in insurance to 74% which is proposed with safeguards will possibly bring in more capital, and more importantly, fresh capital from companies which have been waiting to enter India. “However, apart from that, the important considerations like IFRS17 accounting principles, deferred acquisition costs, Solvency II measures, risk-based capital introduction, etc have to be accelerated at the regulatory and policy levels to bring India at par with the world in actually inviting and encouraging FDI,” he said.

The announcement on increasing the FDI limit lifted share prices of insurance companies. Shares of HDFC Life Insurance ended with gains of 3.14% while New India Assurance closed up 8.94% at Rs 138.30 on the BSE.

Shailaja Lall, partner, Shardul Amarchand Mangaldas, said while this is a welcome move, foreign investors will certainly view this development with ‘a pinch of salt’ and prefer to take a cautious approach. “Much will depend on the fine print of the conditions being proposed. Once there is more clarity, it will need to be seen as to how many foreign investors are willing to infuse capital without the ability to control the board,” Lall said. Any conditionality and regulatory approvals attached to payment of dividends to foreign investors may add another level of complexity. “It is possible that the Irdai (Insurance Regulatory and Development Authority of India) may also prescribe certain conditions to safeguard policyholder money,”

Insurance is a capital-intensive business and an increase in FDI will help growth and penetration in general and health insurance in particular, said Krishnan Ramachandran, MD and CEO, Max Bupa Health Insurance.

Sitharaman also proposed to privatise one general insurance company in 2021-22 and carry out the initial public offering of Life Insurance Corporation (LIC) of India.