NEW DELHI: Finance minister Nirmala Sitharaman said in her Union Budget 2021 speech on Monday that the foreign direct investment (FDI) limit in the insurance sector will be raised to 74 per cent from 49 per cent.
This will be after the Insurance Laws (Amendment) Act 2015 and Insurance Act 1938 are amended in Parliament.
When the insurance sector was privatised in 2000, the FDI limit was fixed at 26 per cent, which was then raised to 49 per cent in 2015.
The finance minister said that a majority of the directors in the board of these insurance companies will have to be resident Indians.
This means that Indian management control will be retained in these companies.
“The FDI limit hike in insurance will allow foreign ownership and control with safeguards. Under the new structure, the majority of directors on the boards and key management persons will be resident Indians with atleast 50 percent directors as independent directors. A specified percentage of profit will be retained as general reserve,” said the finance minister.
On the face of it, the move is positive for the country’s insurance industry that has been saddled with dual issues of stagnating growth amidst the Covid-19 pandemic and rising needs for capital infusion. But, there are a few caveats.
“The move on taxation change for ULIPs (of higher ticket size; annual premium of more than Rs 2.5 lakh) would have an impact on such investments. Tax benefits remains in the event of death of the life assured or in the case of ULIP policies where annual premium is Rs 2.5 lakh or below. This tends to reduce the competitive advantage that ULIPs enjoyed as compared to other short term investment vehicles,” said Tarun Chugh, Managing Director and & Chief Executive Officer, Bajaj Allianz Life.