The Union Budget presented yesterday by the Indian Finance Minister proposes that the foreign direct investment (FDI) limit for the insurance sector be increased from the current 49% to 74%.
Among other proposals mentioned in the Budget that pertain to the insurance industry, Finance Minister Nirmala Sitharaman stated that the IPO of the country’s biggest life insurer, Life Insurance Corporation of India (LIC) will be completed in the fiscal year ending 31 March 2022 (FY2022). She also announced the strategic divestment of one government-owned general insurance company in the next fiscal year.
New FDI cap
Along with the higher FDI ceiling, Finance Minister Nirmala Sitharaman mentioned that amendments to the Insurance Act 1938 will allow foreign ownership and control with safeguards.
“Under the new structure , the majority of directors on board and key management persons will be resident Indians with at least 50% directors being independent directors and a specified percentage of profits being retained as general reserve,” she said.
The proposed relaxation of the ceiling was announced almost 10 years after the government granted approval for the increase of the FDI limit in the insurance sector in India from the 26% to 49% in 2012.
LIC IPO to be a game changer
The much-anticipated IPO for LIC will make the life insurer one of the largest companies in India in terms of market capitalisation. LICI’s IPO plan was announced in the Budget last year and the groundwork for the flotation has begun. The government hopes that the listing would bring discipline to the market and also give retail investors an opportunity to participate in wealth creation. LIC, which was set up in 1956, has assets close to $433bn.
Divestment of public-sector general insurer
Ms Sitharaman did not disclose in her Budget speech the name of the public-sector insurer that will be on the privatisation block. It is among a group of several state owned companies operating in various sectors which will be privatised. She said that the government think tank NITI Aayog to be asked to work on the next list of central public sector companies for disinvestment.
There are four state owned general insurance companies: New India Assurance, United India Insurance (UII), National Insurance Company (NIC) and Oriental Insurance Company (OIC). The government had earlier dropped its plan to merge UII, NIC and OIC and decided to recapitalise them.
For some years now, the government has been divesting some of its interests in the insurance sector. The government divested close to 15% stakes in both New India Assurance and national reinsurer GIC Re in 2017.
The Finance Minister also proposed that there be no tax exemption for maturity proceeds of unit-linked insurance policies (Ulips) with an annual premium of above INR250,000 ($3,420). The rules will apply for Ulips issued on or after 1 February 2021.
According to the Budget statement, “Under the existing provisions of the Income Tax Act, there is no cap on the amount of annual premium being paid by any person during the term of the policy. Instances have come to notice where high networth individuals are claiming exemption under this clause by investing in Ulips with a huge premium. Allowing such exemption in policy/policies with huge premium defeats the legislative intent of this clause.”
Furthermore, in a boost for motor insurers, Ms Sitharaman proposed a vehicle scrapping policy as an initiative to tackle air pollution. The move would help to phase out old and unfit vehicles.