A decision in this regard was taken by the Union Cabinet headed by Prime Minister Manmohan Singh.
"The benefit of this amendment will go to the private sector insurance companies which require huge amount of capital and that capital will be facilitated with increase in FDI to 49 per cent," finance minister P Chidambaram told reporters. The minister also clarified that state-run insurance companies will remain in the public sector.
With the Cabinet approving the proposal, the Insurance Laws (Amendment) Bill is likely to be taken up by Parliament for passage in the forthcoming Winter Session. The bill introduced in Rajya Sabha in December 2008 proposes to increase the foreign direct investment (FDI) limit in the insurance sector to 49 per cent.
However, the standing committee on finance in its report on the bill had rejected the proposal to hike the FDI cap in the insurance sector to 49 per cent, saying this may not have the desired effect and could expose the economy to global vulnerability. The panel, headed by senior BJP leader Yashwant Sinha, though had agreed with the need to bring in comprehensive changes in the archaic laws governing the insurance sector.
The Insurance sector was opened up for private sector in 2000 after the enactment of the Insurance Regulatory and Development Authority Act, 1999 (IRDA Act, 1999). This Act permitted foreign shareholding in insurance companies to the extent of 26 per cent with an aim to provide better insurance coverage and to augment the flow of long term resources for financing infrastructure.
The industry has been demanding for long to increase the FDI limit for adequate funds for expansion of the sector. IRDA chairman J Hari Narayan recently favoured up to 49 per cent foreign investment in the sector.
The government today gave green signal to foreign investment in pension funds and said the FDI limit could go up 49 per cent in line with cap in the insurance sector. Allowing FDI forms a part of the amendments to Pension Fund Regulatory and Development Authority (PFRDA) Bill, which was approved by the Union Cabinet.
"The FDI limit in pension will follow FDI limit in insurance. If insurance bill passes with 49 per cent, pension will also be 49 per cent," finance minister P Chidambaram told reporters. The PFRDA Bill was introduced in the Lok Sabha in March 2011, following which the standing committee on finance gave its recommendations in September last year.
Chidambaram said the government has accepted five key recommendations of the standing committee. The bill, which would allow part investment of the corpus in stock markets, is likely to be taken up for discussion and passage in the upcoming session of Parliament. The original bill had no provisions pertaining to FDI.
However, the standing committee on finance, headed by senior BJP leader Yashwant Sinha, had suggested FDI in pension programmes but with a cap of 26 per cent. The bill had failed to get parliamentary approval in the previous term of UPA 1 government due to strong opposition from its then allies, the Left parties.
In June 2012, the Cabinet had deferred a decision on the bill following opposition from the Trinamool Congress. The bill provides powers to the PFRDA to oversee multiple pension funds in the country and also paves way for being a full-time regulator for the sector. It also provides for establishment of a statutory authority to undertake promotional, developmental and regulatory functions in respect to pension funds.
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