Parliament panel recommends 49% cap on foreign investment in insurance sector

A parliamentary committee has recommended a composite foreign investment cap of 49 per cent in the insurance sector, against the current limit of 26 per cent foreign direct investment allowed in the sector.

The committee, headed by Rajya Sabha MP Chandan Mitra, suggested that the capital requirements of insurance companies may be retained at the Rs100-crore level so as to ensure that health insurers have the financial capacity to provide critical services to customers.

The easing of foreign ownership rules in the insurance business from the current 26 per cent will help boost investor confidence, leading to a consolidation in the insurance sector as smaller firms get the FDI boost to expand since foreign insurers would prefer a 49-per cent stake in Indian JVs over the earlier 26 per cent, to ensure greater control over the business.

''The committee recommends that the composite cap of 49 per cent should be inclusive of all forms of foreign direct investment and foreign portfolio investments,'' said the report tabled in the Rajya Sabha.

The Rajya Sabha had in August appointed a 15-member select committee to scrutinise the Insurance Laws (Amendment) Bill, 2008, which has been hanging fire for the past six years because of political differences.

The government is likely to bring the bill for consideration of the upper house as early as next week, with the committee recommending, "The insurance bill be passed."

The committee, however, wanted the government to take more measures as recommended by it.

The committee has suggested inclusion of a person from the insurance industry in the Securities Appellate Tribunal as an expert. For this, it has also recommended suitable amendments to the Securities and Exchange Board of India Act.

The panel also recommended that penalties on insurance companies be linked to seriousness of offences committed by them. It has suggested mechanism to ensure minimum scope for subjective interpretation.

The committee suggested that the law ministry and the insurance regulator IRDA should modify the definition of the term "nominee" in order to remove any ambiguity, especially in the light of the Supreme Court suggesting that there was no need for two categories of nominees - beneficiary nominee and collector nominee.

It also recommended that adequate protective mechanism be instituted to ensure agents get their commission and the commission structure be determined by IRDA on market conditions.

Four of the 15-member committee - P Rajeev (CPI-M), Derek O'Brien (TMC), Ram Gopal Yadav (SP) and K C Tyagi (JDU) - have  added a dissenting note on the panel recommendation to raise FDI cap.