Parliamentary Committee rejected Proposal to allow 49% Foreign Direct Investment in Insurance Sector

A parliamentary committee on 13 December 2011 rejected almost all the key changes proposed in the Insurance Laws (Amendment) Bill 2008, including the key reform to allow 49% foreign direct investment in the sector.

The the Insurance Laws (Amendment) Bill was introduced in the Rajya Sabha in December 2008 to bring about improvement and revision of laws pertaining to the insurance sector in the changed scenario of private sector participation and was subsequently referred to the standing committee.

The panel headed by BJP leader and former Finance Minister (during NDA regime) Yashwant Sinha maintained that the move to hike the FDI cap in the insurance sector might not have the desired effect and could expose the economy to global vulnerability.

The standing panel pointed out in its report that the proposal to increase the FDI cap to 49 per cent in insurance companies appeared to have been decided upon without any sound and objective analysis of the status of the insurance sector following liberalisation. The commitee asserted that the suggested policy stance of enabling a greater role for foreign capital in the insurance sector, may not necessarily have the desired impact.

Increased role of foreign capital it was feared would lead to the possibility of exposing the economy to the vulnerabilities of the global market, flight of capital outside the country and also endanger the interest of the policy holders.

While opening up the insurance sector to foreign investment in 1999, Parliament was given an assurance that the statutory prescriptions as also the foreign investment regulations would ensure that the cap of 26 per cent on foreign equity participation in insurance companies would not be breached.

The panel maintained that the scope effectively tapping the alternative domestic market route for meeting the capital requirements of the sector was not seriously assessed.

The committee noted that stipulating the capital requirement of insurance businesses is a policy measure which may have implications on the share-holding pattern of the insurer and hence needs to be considered by Parliament.

The government's move was also opposed by both insurance regulator IRDA and GIPSA on grounds that that foreign insurers would be at an advantage over their domestic counterparts in the matter of regulations.

Health insurance business

The panel also rejected the proposal to halve the minimum paid up capital required to start exclusive health insurance business to Rs 50 crore. The committee mentioned that the amount may be inadequate as an insurance company needs to be fully equipped with modern infrastructure and other facilities.

Another proposal to empower the insurance companies to appoint agents and do away with the system of licensing of agents by the regulator, IRDA, was rejected. The panel maintained the measure is inappropriate and fraught with the danger of leading to ineffective regulation of the profession, particularly in instances of unscrupulous act on the part of the agents as also insurance companies.

In its report, the panel suggested the insurance regulator, IRDA, to play a pro-active role towards evolving a common procedure for availing cashless facility and standardising the rates and charges for different hospital procedures, treatment guidelines, forms and formats for settlement of claims.

Decision on SEZ

The standing committee on finance rejected the proposal to allow unregistered foreign entities to operate in special economic zones, or SEZs. The proposal was rejected on grounds that it will place domestic capital at the risk of being taken out of the country and will be biased against Indian insurers. The committee observed that that foreign banks, which operate under the supervision of the RBI, are not allowed any special dispensation in SEZs.