Sunday, November 2, 2008

Bill for Overhauling the Insurance Sector

When debates raged as to the pros and cons of the 123 Agreement on nuclear fuel between India and the U.S., little was it known that its conclusion would benefit the unlikeliest of sectors in the Indian industry. While attention focussed on the fillip it would provide to the Indian energy sector, the political ramifications of the deal, with the departure of the Left, have led to benefits far afield in the insurance sector too. On 1st November, a Bill for the comprehensive amendment of insurance laws, which had been languishing due to Left opposition for the last 4 years, finally received the approval of the Union Cabinet. The Bill is to be introduced in Parliament on December 10, when it reconvenes, subject to it being cleared by then.

The major move proposed in the Bill is raising the cap on FDI in the Insurance sector from the current 26% to 49%. While this higher cap does not apply to public sector insurers, it has already generated activity in the private sector, with reports suggesting that valuations are already underfoot. In the immediate future, this move may receive a lukewarm reception due the financial crunch faced by some financial institutions, which has already made its effect felt on the Indian share market. However, with the need for alternative and safer avenues for investment in the wake of the financial crisis, the proposed change is likely to prove attractive in the days to come. With the widespread consensus over the need to promote credit growth, this can also serve as a useful addition to the cut in interest rates and other measures being introduced to inject capital into the Indian market. Another proposed modification to the holding structure of the insurance companies is allowing the Indian promoters to hold a majority stake (as of now, they are required to drop their holdings to 26% after 10 years of operation). The Bill, which envisages amendments to the Insurance Act, 1938, the General Insurance Business (Nationalisation) Act, 1972, and the Insurance Regulatory and Development Authority Act, 1999, also proposes other changes like allowing foreign insurers to open Indian branches, and lowering the capital requirement of standalone health insurance companies by half. A detailed report on the Bill, and reactions to the same, is available here.

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