On a day the stock markets surged in anticipation and set the stage, the Union Cabinet went full steam ahead with its reform agenda, clearing several crucial financial sector reform measures and the long-pending Companies Bill for Parliament?s consideration.
The Insurance Laws (Amendment) Bill, inter alia, proposes to increase the limit on foreign investment to 49% from 26%, which, if approved by Parliament, could help address capital constraints in the sector, which needs an estimated $10-12 billion for expansion.
Given the greater operational flexibility which come with higher stakes, foreign insurers are expected to raise stakes in their Indian joint ventures. Tata AIG, Bajaj Allianz Insurance, Iffco-Tokio, Kotak Mahindra Old Mutual, Reliance-Nippon Life and HDFC Standard Life are among possible beneficiaries of the move. Finance minister P Chidambaram clarified that public sector insurance companies ?will adopt government policy and remain PSUs,? while the benefit of increased foreign investment will go to private sector insurers. He also said the enhanced foreign investment limit will be composite, including both FDI and FII.
The Pension Fund Regulatory & Development Authority Bill, pending for long in the absence of political consensus, will strengthen the sector regulator with statutory powers, besides throwing the sector open to foreign investment. As per the Bill, foreign investment cap in the sector will move in line with that in the insurance sector. Foreign pension fund managers like Calpers, RBC Global and Schroders would be keen to enter India’s fledgling pension market, analysts said.
Emboldened by the exit of troublesome ally Trinamool Congress which opposed it in a couple of previous Cabinet meetings, the government also cleared the Forward Contracts Regulation (Amendment) Bill. This is to give greater autonomy to the Forward Markets Commission (FMC) and facilitate freer entry of financial institutions into the sector, besides providing for launches of new products such as options and derivatives.
The Companies Bill, seeks to replace the extant Companies Act 1956 and aims to give corporates more functional freedom, while enhancing shareholder democracy. Three governments ? NDA, UPA-1 and UPA-2 ? have worked on this Bill, which also has a provision asking corporates to earmark 2% of their net profit for corporate social responsibility (CSR) initiatives.
The Sensex rose 1% to 19,058.15 points, its highest close since July 7, 2011. The 50-share Nifty gained 0.98% to 5,787.60, its highest close since April 27, 2011.
All these measures will, however, need legislative changes and they could again face a Parliamentary hurdle for want of consensus across political parties.
Chidambaram said the government would continue to engage with all political parties to get the Bills passed in Parliament.
Analysts tracking the pension and insurance sectors also said that while there is a lot of interest from foreign investors with deep pockets in the Indian insurance and pension markets, it will take a while for FDI to flow in and for foreign investors to increase their stakes. Lack of support from BJP and even allies had ensured that the Insurance Laws Amendment Bill, 2008 was kept pending in Rajya Sabha.
Insurance Regulatory and Development Authority (Irda) chairman J Hari Narayan had said that the regulator favored 49% FDI in the sector to ensure the needed growth in the sector.
Anish Thacker, tax partner, Ernst & Young, termed the move significant, since the insurance sector is capital-intensive and most life insurance companies turn profitable only by their tenth year of operations. ?You need capital to expand and pay additional bonus. But Indian shareholders do not have that much capital. The move will allow Indian shareholders to unlock value by selling their stake, while foreign investors will get the much needed operational flexibility being an almost equal partner,? Thacker said.
Even the pension sector with its low penetration will get to see some expansion, he said, adding however, that due to recession in the West, it may take some time for foreign funds to flow into these sectors.
Rajesh Relan, MD & country manager, MetLife India Insurance said if the proposed insurance reforms are implemented, it would help increase customer penetration with a range of products focused on today?s uninsured. The growth of life insurance sector will, in turn, trigger a cycle of economic activity across various sectors such as real estate, construction and IT.
Existing and new insurers have invested significant capital initially and only some companies have recently turned profitable, including MetLife.
Amarnath Ananthanarayanan, CEO & MD, Bharti AXA General Insurance, said: ?Given the policy paralysis, the slew of regulatory announcements including this one pertaining to insurance will strike the right cord with all stakeholders. The move to increase FDI in insurance is a step in the right direction as it will increase the contribution from foreign players in all technical aspects of the insurance business including product development and claims settlement mechanisms.?
The Cabinet also approved the 12th Plan document and amendments to the Competition Act, giving the Competition Commission of India powers across all sectors on M&A regulation. There will, however be, provision in the Act to exempt specific sectors like banking.
Incidentally, a parliamentary panel led by former finance minister and BJP leader Yashwant Sinha, which included even Congress MPs, had opposed any further increase in the FDI cap in insurance from 26%. Trinamool Congress, SP, BSP, Left parties and BJD are also against any move to permit more FDI in insurance and pension. BJP is okay with 26% FDI in pension.
With 22 MPs in Lok Sabha, SP ? an outside supporter of the UPA government ? will hold the key to the passage of legislation. However, the government is a minority in Rajya Sabha.
