Finance Minister Nirmala Sitharaman has proposed to enhance the foreign direct investment (FDI) limit in insurance to 74 per cent along with relevant safeguards.

As part of the Union Budget 2021-22, she has proposed to amend the Insurance Act to increase the permissible FDI limit to 74 per cent in insurance companies and allow foreign ownership and control with safeguards.

At present, FDI up to 49 per cent is permitted in insurance companies.

“Under the new structure, the majority of directors on the board and key management persons would be resident Indians with at least 50 per cent of the directors being independent directors and a specified percentage of profits being retained as general reserve,” Sitharaman said.

There would be safeguards in relation to payment of dividends, as a specified percentage of profits will be required to be retained in the insurance company as a general reserve.

Insurers have welcomed the move as insurance is a capital-intensive business.

“Post the pandemic, many Indian partners are not in a position to invest further capital in their companies. Certain companies also require capital infusion to conserve solvency margins. The Covid-19 pandemic has shown that further penetration of insurance in India is needed, and for that capital infusion is required. The FDI hike will give the foreign promoter an opportunity to buy out their cash-strapped Indian partners if required and provide the needed cash infusion,” said Vighnesh Shahane, MD and CEO, Ageas Federal Life.

“A more liberal FDI policy will certainly attract higher amounts of foreign capital, which will aid in increasing insurance penetration in India. It will also provide an impetus to the insurance industry to scale up and build more digital and infrastructure capabilities in the post pandemic era,” said Shailaja Lall, Partner, Shardul Amarchand Mangaldas & Co.

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