Posted by: John Elliott | October 31, 2008

At last, India begins to open up insurance to more FDI

At last India’s coalition government is moving ahead with economic reforms that were blocked till two months ago by Leftist parties as the price for support that gave the United Progressive Alliance (UPA) coalition its parliamentary majority – support that now comes from a motley collection of other regional parties.

Last month the government relaxed rules for foreign investment in news magazines, and today finance minister Palaniappan Chidambaram announced it is introducing a Bill into parliament in December to increase the limit on foreign direct investment (FDI) in insurance companies from the current 26% to 49%.

The bill will probably have to go through a committee stage, so will not be passed in the coming parliamentary session. That means it may not become law before the next general election, which is due by April but might be held earlier.

But at least the government is making a move on a measure that has been delayed for many years, and which is urgently needed because it will enable India’s insurance joint ventures to boost their capital bases with increased funds from their foreign partners. Taking the limit to 49% will also encourage foreign companies in these joint ventures to put more muscle into their insurance activities here.

When insurance FDI was first mooted in  the mid-1990s, foreign companies such as the now seriously-ailing AIG imperiously announced that it would never come to India unless it was allowed 75%, or some such majority figure.

Every time the AIG’s proud then-chairman Maurice Greenberg visited India and trumpeted such majority-ownership figures, he put back the introduction of the reforms by many months. Eventually, without a murmur, AIG came in (with Tata) at 26%, showing that big foreign stakes are not always needed to attract foreign investors. But it has taken too long for that figure to be raised, and the expansion of the industry has suffered as a result.

India has over 40 registered life and general insurance companies – see http://www.irdaindia.org/ – and a considerable number of joint ventures with foreign firms that include Metlife, Prudential Financial, New York Life, Allianz, ING, Standard Life , Sunlife, AXA Life and Fortis that have tied up with some of India’s biggest business names including Birla, Bajaj, Bharti, ICICI and HDFC, as well as AIG with Tata.

A study published  earlier this year by New York Life and its partner, Max India,
pointed to the potential when it found that only 24% of Indian households have life insurance. It estimated that there were 21m households “that could be a lucrative target for life insurance marketers.” That is the size of the business that the Left was helping to block.

Of course, it is not just the Left parties alone. They have been – and still are – the standard bearers for insurance trade unions operating in India’s big and very over-manned and inefficient public sector insurance companies, and they in turn are backed by the companies’ top management and staff.

Significantly Mr Chidambaram – for more than a decade a champion of substantial insurance FDI – has also announced legislation to allow the government-owned Life Insurance Corporation (LIC), the country’s biggest player, to double its capital base to Rs1bn (roughly $20m). That should help to buy off a sizeable chunk of the opposition.


Responses

  1. Good post. Coming more FDI to India is already doing good to Indian insurance industry. Insurers capital base is now widening and our society is benefiting in terms of quality products and service.


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