FDI in Insurance: ‘More investments may result in FIIs controlling stakes in Indian firms’

Clarification provided by the Department of Finance Services over ‘FIIs holdings coming under FDI’ may boost FIIs in increasing their investments, but, there is also a danger that FIIs having controlling stakes in Indian insurance sector

By Sai Nikesh D

The holdings of Foreign Institutional Investors (FIIs) in Indian insurance promoters will not be part of the total Foreign Direct Investment (FDI), informed an official release on Wednesday.

Informing this, the Insurance Regulatory Authority of India (IRDAI) was said to have published on Wednesday, a clarification by the Department of Financial Services on the matter.

According to the clarification provided, holdings of equity in an Indian promoter company held by FIIs, other than the foreign promoters of the applicant and their subsidiaries and nominees, will not be part of the FDI and this was seen as a relief to several Indian entities that have a high FII holding.

Jose Verghese, Advisor, United India Insurance Officers’ Association (UIIOA), said, “Although the clarification may come as a help to FIIs in boosting up their investments in Indian insurance companies, there is also a danger that more investments beyond limits could result FIIs in having controlling stakes in Indian insurance sector, due to 49% FDI and their already-existing stakes in Indian entities.”

This would be against the spirit of Indian Insurance Laws Amendment Bill 2015, he noted.

He further explained that Indian insurance sector has a huge potential, but, is at very young stage with insurance penetration and density levels being lower than that of developed countries, even developing countries like Brazil and China.

Since there is a huge potential available, the sector is likely to attract more investments in the coming decades, he added.

It is noteworthy that according to the Foreign Investment Promotion Board (FIPB) rules in February 2015, foreign equity investment cap of 49% is applicable to all Indian insurance companies.

The FIPB rules would not allow the aggregate holdings by way of total foreign investment by foreign Investors in their equity shares, including portfolio investors, to exceed 49% of their paid-up equity capital and also ensures that ownership and control shall remain at all times in the hands of resident Indian entities.

This article was published in The Dollar Business on July 9, 2015

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