IMPACT ANALYSIS OF FDI ON INSURANCE SECTOR IN INDIA

Abstract

Parliament has passed Insurance Laws (Amendment) Bill, 2015. It was first passed in LokSabha on 4 March
2015 and later in RajyaSabha on 12 March 2015,which will become an Act when the President signs it. The
amendment bill aims to bring improvements and revisions in the existing laws relating to insurance business
in India. The bill also seeks to remove archaic provisions in previous laws and incorporate modern day
practices of insurance business that are emerging in a changing dynamic environment, which also includes
private participation. It is expected that the foreign investment would bring about 20,000-25,000crore in
short funds. The amendment bill hikes Foreign Direct Investment (FDI) cap in the insurance sector to 49
percent from present 26 percent. The foreign investment in insurance would be routed under foreign direct
investment,foreign portfolio investment,foreign venture capital investment,depositoryreceipts,andnon
residentindians. Insurance companies are permitted to raise capital through instruments other than equity
shares. Instruments would be specified through separate regulations by the Insurance Regulatory and
Development Authority of India (IRDA). However, the voting rights of shareholders are restricted only to
equity shares. Sale of shares over 1% of the total equity share capital and purchase of shares resulting in total
equity share capital of more than 5%, requires the prior approval of the IRDA.
It also adds provision for the establishment of Life Insurance Council and the General Insurance Council.
These councils will act as self-regulating bodies for the insurance sector. The bill also grants permission
to PSU general insurers to raise funds from the capital market and increases the penalty to deter
multilevel marketing of insurance products. There is a strong relationship between foreign investment
and economic growth. Larger inflows of foreign investments are needed for the country to achieve a
sustainable high trajectory of economic growth. A major role played by the insurance sector is to mobilize
national savings and channelize them into investments in different sectors of the economy. FDI in
insurance would increase the penetration of insurance in India; FDI can meet India's long term capital
requirements to fund the building of infrastructures. The present paper focuses on the overview of the
Indian insurance sector along with the opportunities due to expansion of FDI in insurance in India and
the major challenges that it faces.