Amid insurance companies dealing with higher claim payouts during the ongoing Covid-19 pandemic, Finance Minister Nirmala Sitharaman has proposed to enhance foreign direct investment limit in insurance to 74 per cent, along with relevant safeguards.
“I propose to amend the Insurance Act, 1938 to increase the permissible FDI limit from 49 per cent to 74 per cent in insurance companies and allow foreign ownership and control with safeguards,” she said as part of the Union Budget 2021-22.
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 directors being independent directors, and specified percentage of profits being retained as general reserve, she further said.
Insurers welcomed the move as insurance is a capital intensive business, but are awaiting more details.
“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 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.
The government had, in 2015, permitted FDI in insurance companies up to 49 per cent through the automatic route from 26 per cent earlier. In Budget 2019-20, 100 per cent FDI in insurance intermediaries was announced.
Mohammed Ali Riyazuddin Londe, Vice-President, Senior Analyst, Financial Institutions, Moody’s Investors Service, said the proposal is credit-positive. “...it provides Indian insurers with new sources of funding and access to external know-how that can improve their underwriting performance and unlock new operating efficiencies.
The possibility of higher foreign ownership would improve insurers’ financial flexibility by offering additional opportunities to bolster solvency and insurers would benefit from the sharing of risk management best practices, he further said.
Pain for life insurers
However, a proposal to do away with the tax exemption for maturity proceeds of unit-linked insurance policies (ULIPs) that have an annual premium of ₹2.5 lakh and more, could spell pain for life insurance companies.
“For annual premium above ₹2.5 lakh for ULIPs, the maturity benefit will now be taxed as capital gains The Budget endeavours to selectively bring in taxation parity between life insurance companies and mutual funds,” said Rushabh Gandhi, Deputy CEO, IndiaFirst Life Insurance Company.
However, tax exemption for maturity proceeds for ULIPs under section 10(10D) for annual premiums up to ₹2.5 lakh continues and death benefit continues to be exempt for annual premiums over ₹2.5 lakh for ULIPs.
According to Prayesh Jain, Lead Analyst, Institutional Equities, YES Securities, the move could impact flows in the segment where ICICI Pru Life Insurance and SBI Life have the highest share.
Interest in ULIPs have been reviving in recent months with improved stock market performance.