The government plans to increase foreign direct investment (FDI) in the insurance sector to 49 per cent with a rider that voting right of overseas partner will remain capped at 26 per cent.
The Insurance Laws (Amendment) Bill, 2008 proposes an increase in foreign holding in insurance joint ventures to 49 per cent from the existing 26 per cent with corresponding voting rights.
The Finance Ministry now proposes an amendment to the the Bill, pending since 2008, by capping voting rights of the foreign partner to 26 per cent even as FDI is raised to 49 per cent, sources said.
This is being done in the interest of meeting the growing capital requirement of insurance companies which are highly capital intensive.
Sources said the proposal says that equity shares of foreign company should not exceed 49 per cent of total paid-up equity capital of an insurance company provided voting rights of such foreign shareholders are not exceeding 26 per cent in aggregate.
Besides, the CEO of the insurance joint venture should be appointed by Indian shareholders subject to regulatory approvals, according to the proposal.
The proposal also stipulates that the majority of company's directors should be Indian nationals.
Sources said a draft Cabinet note by the Department of Financial Services to this effect has been circulated.
A proposal to hike the FDI cap in the sector was first mooted by the previous UPA government. The is been pending in the Rajya Sabha since 2008.
The proposal said the additional amendment would incorporate suitable safeguards and restrictions on foreign equity investment in the insurance sector while enhancing the overall cap to 49 per cent as envisaged in the Bill.
This is considered essential in the light of the prevailing economic and insurance industry environment and the sensitive nature of the subject of foreign equity investment, it said.
The Standing Committee on Finance had earlier rejected the proposal to hike FDI in the insurance sector, saying it may not have the desired effect and could expose the economy to global vulnerability.
The ruling BJP had earlier opposed raising the FDI cap in the insurance sector from 26 per cent to 49 per cent.
The insurance sector was opened up to the private sector in 2000 after the enactment of the Insurance Regulatory and Development Authority Act, 1999.
Last month, Finance Minister Arun Jaitley had met CEOs of private sector companies to discuss issues related to capital requirements, including cap on foreign direct investment.
The industry has been demanding raising FDI limit to 49 per cent from 26 per cent at present so that get the much needed capital to enhance their business.