Financial Daily from THE HINDU group of publications
Friday, Jul 09, 2004
Industry & Economy
Money & Banking - Insurance
Insurance FDI limit raised to 49 pc
New Delhi , July 8
IT'S celebration time in the insurance industry. The hike in the insurance foreign direct investment (FDI) limit to 49 per cent from the present 26 per cent announced by the Finance Minister was what the industry had been anxiously waiting for several years.
However, insurance companies have to wait a while before initiating the formal process of hiking FDI since a change in the equity pattern requires the Parliament nod. A 26 per cent cap is prescribed currently in the IRDA Act, 1999.
Divergent views have emerged in the industry on the proposed roadmap that companies will adopt for hiking the foreign partner's holding. While one segment feels the best way is a direct equity swap between the foreign and Indian partners, others feel that the foreign partner might gradually infuse additional capital as and when required. This they will ensure a steady hike of their share of the paid-up capital to 49 per cent.
"I think the better way would be to bring in fresh capital instead of a direct swap of equity between partners," said the Managing Director and Chief Executive Officer, ICICI Lombard General Insurance Co, Mr Sandeep Bakhshi. He said that the enhanced flow of capital from the foreign partner could result in a major expansion of the distribution network of insurance companies. This will provide increased access to insurance products to more people.
"The fresh capital would go in to strengthen the distribution networks," Mr Bakhshi said.
But, Mr Naren N. Joshi, Chief Representative of ING Insurance International, said the Indian partner straight away divesting stake to the foreign partner was the preferred way to hike FDI limit stake.
"I think Indian partners would like to divest their stake to the foreign partner and use the resources for some other productive purpose," Mr Joshi said.
He pointed out that in many private insurance ventures, the Indian partner found it hard to pump in additional fund whenever equity capital had to be hiked for business growth.
"The Indian partners mostly have been hard-pressed," Mr Joshi said.
Terming the FDI cap hike as "progressive," Mr Antony Jacob, Managing Director, Royal Sundaram Alliance Insurance Company Ltd, said it would enable the industry to continue expanding.
"Increasing capital participation of international insurers will accelerate the development of the Indian insurance industry, through the greater deployment of technical competencies and innovative products and processes," Mr Jacob said.
Our Bangalore Bureau adds:
Mr Venkatesh Mysore, Managing Director, Metlife India Pvt Ltd, said, "The relaxation is a right step and will help insurers to significantly increase the insurance penetration in the country."
Mr Frank Koster, Managing Director and Chief Executive Officer, ING Vysya Life Insurance Company, said, "We endorse the positive attitude with which the Finance Minister and the new Government have taken on the difficult challenges facing the Indian economy. We look forward to bolder measures in the coming months."
Mr Mysore said that the Government's move would allow the insurers in the country to achieve a faster growth rate, benefiting the country's efforts to augment long-term savings and investments. It would also help insurers to bring more products into the country suitable for the rural areas of the country, they said. Accordingly, insurers said that the insurance penetration was likely to improve from the current level of 2 per cent to reach the Asian average of about 4.5 per cent of the gross domestic product.
However, some concerns were expressed about the budgetary levy of a 10 per cent service tax on insurance premiums. Insurers said that this tax was regressive.
Mr Koster said, "While we support the widening of the tax base `in principle' the implementation of this proposal may have certain practical difficulties."
Besides, there was also the possibility that the service tax effect would have a double impact on customers, Mr Mysore said. This was because both the insurer and the insurance distributors would load the tax on the premium, leading to an escalation in the final premium expenditure for the customer.
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