Insurance Sector Gets A Lifeline: 49% FDI Approved
Insurance Sector Gets A Lifeline: 49% FDI Approved
Companies promoting insurance firms gained in trade following the approval of increase in FDI in this sector by the Union Cabinet . The Cabinet has approved 49% FDI in the insurance sector. Bank of India which is one of the promoters of Star Union Daiichi has gained in terms of shares by experiencing a high of 5.01 percent at Rs.301. ax India which promotes life and non-life companies has gained around 3.76% to reach Rs.331 while Exide Industries was also quoted by media reports to be rising as a result of the announcement.
Apart from this IDBI as well as Andhra Bajaj Finance ,Canara Bank and PNB reported gains. However, shares of ICICI Bank as well as HDFC and Kotak Mahindra reported marginally lower gains.
For some of the cases,the media reported that the pricing formula for the sale of the stake is predetermined while is an agreement for the transfer of stake in market value in some other cases. The FM also announced that 49% stake is to be allowed under the FIPB route as against current automatic approval process. Such a requirement of FIPB approval could ensure case-by-case clearance.
The FIPB requirement has also caused concerns in respect of those firms where the foreign partner has captured management control via the right to appoint the CEO. In certain cases raising the stake to 49 percent ensures that the foreign insurance company becomes the largest shareholder due to the presence of multiple partners.
The Narendra Mody Cabinet has presently approved the hike of FDI in the insurance sector to 49% from current level of 26% as per media reports . Now the Insurance Laws (Amendment) Bill is to be presented in the current Parliament session . The hike is part of the Budget and therefore Cabinet as well as Parliamentary approvals were in the offing. With both BJP and Congress said to be supporting the bill, there is unlikely to be opposition to it. Private sector companies in the insurance sector will now have access to bigger fund flow from global investors.
During the Budget speech , the FM had announced that FDI will be selectively opted for and the insurance sector will be the first to get it on account of massive shortage of funds. The control will lie with the Foreign Investment Promotion Board. The government is also set to take up the Insurance Amendment Bill soon in the Parliament.
This bill has been pending in the Parliament since 2008 due to objections from the opposition at that time. For the 49% limit, the FIPB must give approval. Experts are saying this could influence the inflows with some pegging fund inflows to be as high as Rs. 60,000 crore. For the insurance sector, this is a welcome rescue.
