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June 6, 2014
Raising the foreign investment cap in insurance companies from 26% to 49% is inevitable, for the insurance industry to grow, according to the former chairman of the Insurance Regulatory and Development Authority (IRDA), Mr J Hari Narayan.
Mr Hari Narayan, who was appointed as a chairman of IRDA in 2008 and retired from the post in February 2013 after completing his term of five years, said that this is because there will not be enough capital available to fund the expansion of the insurance industry unless the foreign investment cap is raised.
In an interview with the CNBC-TV18 network, he said that there are two other reasons why the ceiling should be raised. He said: “One is, by increasing the FDI levels to 49%, we can straightaway expect an inflow of around US$1-1.5 billion or something of that order, and that will help boost our foreign exchange reserves.”
Secondly, capital of US$1.5 billion would be released from investors who have pumped INR250 billion (US$4.22 billion) worth of investments into the industry. “So that amount of fresh capital will be available in the hands of entrepreneurs who would then invest in various other opportunities which they see is appropriate,” he said.
Dismissing concerns that a foreign investor with a 49% stake could control an insurance company and thus the lifetime savings of a large number of Indians, Mr Hari Narayan said that insurance regulations are very strong in India.
“In the insurance industry, what we really regulate and regulate very closely is the availability of assets to back the entire liability of the insurance companies …This is true for the life industry and is also true for the non-life industry. And not only are the assets fully protected and carefully assessed with regard to the liabilities but in India, we also require insurance companies to maintain a margin of 1.5 times over their liabilities at any and all points of time. So, the question of anybody taking away the assets or going away just does not arise. The question of a Lehman-type collapse happening in the insurance industry just does not arise,” he said.
Speaking at the same interview, Mr Kshitij Jain, Managing Director and CEO of Exide Life Insurance (formerly known as ING Vysya Life), said: “ I think the industry over the last 12 years has attracted over INR330 billion of capital across all the private life insurance companies and I think it is an openly known fact that over the next five to 10 years, the industry requires as much, if not more, in terms of fresh capital to be able to fund its growth and expansion.”
Asked whether foreign players would flood into India when the foreign investment ceiling is raised to 49%, Mr Jain said: “Perhaps not. But in the mid to long-term, we would certainly be in a situation where a lot of foreign insurers should be very keen to invest in this market because over the long-term, our market continues to have very strong fundamentals and continues to be a very attractive space to be in.”
Mr Hari Narayan, noting the level of investment in the insurance industry in India to date already, added: “With regard to new insurance companies coming up, no, I don’t think so, I don’t think there is such an appetite at the moment.”
The Finance Ministry is currently considering an increase in the foreign direct investment ceiling in the insurance sector to 49%, subject to some restrictions including capping the voting rights of foreign shareholders.