Increase of F.D.I.

Cap in Insurance Sector: Impact on Indian Economy

1
K.V.R.SATYA KUMAR
AsstProfessor, Dept of Management Studies, St.Peters Engineering College, Hyderabad.
2
Dr.B.RADHA
Associate Professor, PG Department of Commerce VRS&YRN College, Chirala.

Abstract
Developed nations, across the whole globe, consider FDI as the safest type of
international capital flows out of all the available sources of external finance available to them.
During 1990s, FDI inflows rose faster than almost all other indicators of economic activity
worldwide. Developing nations like India looks FDI as a source of filling the savings, foreign
exchange reserves, revenue, trade deficit, management and technological gaps. There are several
factors as to why FDI should be considered as an instrument of international economic
integration as it brings a package of assets including capital, technology, managerial skills and
capacity and access to foreign markets.

Taking into accounts the above factors, government of India decided to increase the FDI cap in
the insurance sector, taking the 49%. The step was taken during the monsoon session of the
parliament, Finance budget for the year 2013-14. Insurance is one such sector that nations look at
FDI so that new strategies creeps in promoting the products in a proper way. In this paper will
analyse how the companies are attracting the customers by using marketing strategies in
insurance sector ,and to analyse guidelines given by the IRDA on FDI in insurance sector, and
the foreign direct investments will ultimately affect the Indian Economy.
INTRODUCTION
Foreign Direct Investment, generally speaking, refers to the capital inflows from abroad that
invest in the production capacity of the economy and are “usually preferred over other forms of
external finance because they are non-debt creating, non-volatile and their returns depend on the
performance of the projects financed by the investors.FDI inflows generally helps the developing
countries to have a effective, broad and transparent policy environment for investment issues as
well as, builds human and institutional capacities to execute the same. Insurance sector is the
considerable importance to every developing economy.

Objectives of the Study

1) To exhibit the sector-wise & year-wise analysis of FDI’s in India.
2) To study the impact of FDI in Insurance Sector on Indian Economy
Methodology of Study
The present study is purely depending upon secondary data which is procured from
Books, journals, magazines, newspapers and WebPages.

FDI have helped India to attain a financial stability and economic growth with the
help of investments in different sectors. FDI has boosted the economic life of India and on the
other hand there are critics who have blamed the government for ousting the domestic inflows.
After liberalization of Trade policies in India, there has been a positive GDP growth rate in
Indian economy. Foreign direct investments helps in developing the economy by generating
employment to the unemployed, Generating revenues in the form of tax and incomes, Financial
stability to the government, development of infrastructure, backward and forward linkages to the
domestic firms for the requirements of raw materials, tools, business infrastructure, and act as
support for financial system. Forward and back ward linkages are developed to support the
foreign firm with supply of raw and other requirements. It helps in generation of employment
and also helps poverty eradication. There are many businesses or individuals who would earn
their lively hood through the foreign investments. There are legal and financial consultants who
also guide in the early stage of establishment of firm.
Foreign investments mean both foreign portfolio investments and
foreign direct investments (FDI). FDI brings better technology and management, marketing
networks and offers competition, the latter helping Indian companies improve, quite apart from
being good for consumers. Alongside opening up of the FDI regime, steps were taken to allow
foreign portfolio investments into the Indian stock market through the mechanism of foreign
institutional investors. The objective was not only to facilitate non‐debt creating foreign capital
inflows but also to develop the stock market in India, lower the cost of capital for Indian
enterprises and indirectly improve corporate governance structures. On their part, large Indian
companies have been allowed to raise capital directly from international capital markets through
commercial borrowings and depository receipts having underlying Indian equity. Thus the
country adopted a two‐pronged strategy: one to attract FDI which is associated with multiple
attendant benefits of technology, access to export markets, skills, management techniques, etc.
 and two to encourage portfolio capital flows which ease the financing constraints of Indian
enterprises.
Table 1 FDI EQUITY INFLOWS (MONTH-WISE) DURING THE FINANCIAL YEAR 2014-15:

Financial Year 2014-15 Amount of FDI Equity inflows

( April-March ) (In Rs. Crore) (In US$ mn)
1. April, 2014 10,290 1,705
2. May, 2014 21,373 3,604
3. June, 2014 11,508 1,927
4. July, 2014 21,022 3,500
5. August, 2014 7,783 1,278
6. September, 2014 16,297 2,678
7. October, 2014 16,288 2,655
8. November, 2014 9,486 1,537
9 December, 2014 13,562 2,161
10 January, 2015 27,880 4,481
11 February, 2015 20,397 3,288
12 March, 2015 13,221 2,117
2014-15 ( from April, 2014 to March, 2015) # 189,107 30,931
2013-14 (from April, 2013 to March, 2014) # 147,518 24,299
%age growth over last year ( + ) 28 % ( + ) 27 %
Source http://dipp.nic.in/
Interpretation:

Table 1 shows the amount of FDI inflows from April 2014 to March, 2015. It shows the amount
in Rs crore and in US $ mn. The highest FDI inflows in the country is in the month January 2015
i.e. 27880 in Rs crores and 4484 in US $ mn. Other months shows the fluctuating trend.

INTERPRETATION
Chart 1 shows the total FDI inflows during the time period April 2014 to March,2015. The FDI
inflow shows a fluctuating trend in different months.

FDI IN INSURANCE SECTOR:

FDI in insurance sector inculcates the savings habit, which in turn generates long-term investible
funds for infrastructure building. In India, insurance sector is one of the most vial sectors as it
ensures constant inflow of funds – the payout is staggered and contingency related – thereby
making it readily available for investment on infrastructure building. Insurance Sector contribute
to GDP, is quite insignificant. Insurance Sector, in India , had opened up the insurance sector for
private participation in 1999, also allowing the private companies to have foreign equity up to 26
per cent. When it was done, many private companies are now into the insurance business. But
now the new government in 2014, through The Insurance Laws (Amendment) Bill aims to raise
the ceiling on foreign direct investment (FDI) in insurance to 49 per cent from the current 26 per
cent limit. This will mark the new beginning in the insurance sector and will bring a lot of capital
inflows in the Indian economy.

The most preferred destination for FDI in India in the last decade is financial,
insurance and banking services (BFSI). This investment accounted for more than 12% of the
total cumulative FDI inflow in India and services sector is 59%. Between financial year 2000-11,
service sector (BFSI and non financial) attracted USD 31 Bn FDI. BFSI FDI share amounted to
USD 18 Bn with 59% share. The subsectors of BFSI attracted the FDI inflows as Banking: USD
2.9 Bn, Financial: USD 13 Bn., and Insurance: USD 2.3 Bn. Shown in table no.-3 and 4. As far
as the Indian financial service sector is concerned, Mauritius had a largest share of 43% of FDI
investment amongst top countries. Singapore (14%), UK (11%), USA (8.5%) & Cyprus (3%) are
the other countries in the top five lists. The total top 10 BFSI FDI equity inflows in India
amounted to USD 4.2 Bn in the last decade. In the BFSI FDI investors, the key US companies
are Merill Lynch, Morgan Stanley, Bank of New York Mellon, JP Morgan, Citibank Overseas,
Franklin Templeton, New York life, AIG, Pramerica and PE/VC firmslike Warburg, Black stone,
Carlyle, KKR & Co. and Apollo. Development of Indian capital markets (especially corporate
bond markets) & further policy liberalization in commercial banking is the key for the future
investment in Indian BFSI segment.

Opening up of the sector

The insurance sector opened up in 2001, with the foreign direct investment ("FDI") limit being
set to 26 per cent. According to various reports this sector has subsequently witnessed two
phases: one that saw high growth between 2001 and 2010 and the other, a dormant period
between 2010 and 2012. However, apart from these periods of rapid and moderate growth, the
industry has also seen product and operational innovations, given the increase in competition. As
of FY 13, the total market size of this sector was US$ 66.4 billion and is expected to touch US$
350-400 billion by 2020. According to experts, while India’s insurance industry is no doubt
growing and is poised to grow further, it is also facing profitability issues on account of
distribution and operating models. It pegs the cumulative losses to private life insurers in the
excess of Rs 187 billion till March 2012. Slow growth, rising costs and stalled reforms are
further hindering the steady growth of this industry.

Table 2 SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS

 Amount in Rs. crores
(US$ in million)
Ranks Sector 2012-13 2013-14 2014-15 Cumulative % age to total
Inflow
(April- (April ‘14- Inflows s (In
( April -
March) March, 2015) (April ‘00- terms of US$)
March)
March, 2015)

1. SERVICES SECTOR ** 26,306 13,294 19,963 205,532

17 %
(42,713)
(4,833) (2,225) (3,253)

2. CONSTRUCTION DEVELOPMENT: 7,248 7,508 4,582 113,140

TOWNSHIPS, HOUSING, BUILT-UP (1,332) (1,226) (758) (24,064) 10 %
INFRASTRUCTURE

3. TELECOMMUNICATIONS 1,654 7,987 17,372 84,092

7%
(radio paging, cellular mobile,
basic (304) (1,307) (2,895) (17,058)
telephone services)

4. COMPUTER SOFTWARE & 2,656 6,896 13,564 73,235

6%
HARDWARE
(486) (1,126) (2,200) (15,017)

5. DRUGS & PHARMACEUTICALS 6,011 7,191 9,211 65,282

5%
(1,523)
(1,123) (1,279) (13,121)

6. AUTOMOBILE INDUSTRY 8,384 9,027 15,794 63,991

5%
(1,537) (1,517) (2,570) (12,383)

7. CHEMICALS (OTHER THAN 1,596 4,738 4,077 49,310

4%
FERTILIZERS) (292) (878) (669) (10,337)

8. POWER 2,923 6,519 3,985 46,640

4%
(536) (1,066) (657) (9,557)

9. 7,878 3,436 2,897 41,147 3%

METALLURGICAL INDUSTRIES
(1,466) (568) (472) (8,547)

10 3,901 8,191 16,962 43,799

TRADING (718) (1,343) (2,761) (8,060 3%
: (i)** Services sector includes Financial, Banking, Insurance, Non-Financial / Business, Outsourcing, R&D, Courier,
Tech. Testing and Analysis
(ii) Cumulative Sector- wise FDI equity inflows (from April, 2000 to March, 2015) are at - Annex-‘B’.
(iii) FDI Sectoral data has been revalidated / reconciled in line with the RBI, which reflects minor changes in
the FDI figures (increase/decrease) as compared to the earlier published sectoral data.

Source http://dipp.nic.in/
Interpretation
Table 2 shows the favorite and leading sectors for FDI in India. According to FDI report
Service sector is the favorite sector with highest FDI inflow 17%. After service sector
infrastructure is the next favorite sector with 10% and 7% in telecommunications.

Chart 2 shows that service sector has the highest FDI inflow attracting 17% share. Other sectors have less
FDI inflow in India. Telecommunication, computer software attracts only 7% & 6%

Table 3 FINANCIAL YEAR-WISE FDI EQUITY INFLOWS

Amount of FDI
S. Nos Financial Year Inflows %age growth
(April – March) over
FINANCIAL YEARS 2000-01 to 2014-15 (up to March, 2015) previous year
In Rs crores In US$ million (in terms of US
$)
1. 2000-01 10,733 2,463 -
2. 2001-02 18,654 4,065 ( + ) 65 %
3. 2002-03 12,871 2,705 ( - ) 33 %
4. 2003-04 10,064 2,188 ( - ) 19 %
5. 2004-05 14,653 3,219 ( + ) 47 %
6. 2005-06 24,584 5,540 ( + ) 72 %
7. 2006-07 56,390 12,492 (+ )125 %
8. 2007-08 98,642 24,575 ( + ) 97 %
9. 2008-09 142,829 31,396 ( + ) 28 %
10. 2009-10 123,120 25,834 ( - ) 18 %
11. 2010-11 97,320 21,383 ( - ) 17 %
12. 2011-12 165,146 35,121 (+) 64 %
13. 2012-13 121,907 22,423 (-) 36 %
14. 2013-14 147,518 24,299 (+) 8%
15. 2014-15 189,107 30,931 (+) 27%
CUMULATIVE TOTAL
1,233,538 248,634 -
 (from April, 2000 to March, 2015)
(As per DIPP’s FDI data base – equity capital components only): Source http://dipp.nic.in/

INTERPRETATION
Table 4 shows the total amount of FDI inflows in India during the last 10 years i.e. 2000 to
2015. The FDI inflow from 2000- 2001 i.e. 10,733crore Rs. in 2001-02 it was 18,654 crore
rupees. It shows the Good result in the FDI inflows in India. Little bit ups and downs in FDI
inflows but after that great hike in the year 2007-08 i.e. 98,642crore rupees as compare to earlier
years. in the current year there was a huge investment in FDI in 189107 crore Rupees and so on.
So we can say that the foreign investment have been on rise in India.

Interpretation
The chart 4 shows that a FDI equity inflow is maximum in the year 2014‐15. From 2000‐01 to 2006‐07 it
has very less of FDI equity inflows in India. But from 2008 to 2014 it shows a fluctating trend.
EFFECTS ON INDIAN ECONOMY:
Following will be the effect of the increase in the threshold in the Indian economy:

 Firstly, through this Insurance Laws (Amendment) Bill, a rise to 49% will be a composite
cap – which means that foreign capital can flow in either as direct investment or via the
portfolio route, or as a combination of both. So foreign investors can either directly buy
equity from the company or can buy shares on the stock market.
 Secondly, it will lead to hike foreign holding in insurance joint ventures to 49 per cent
which means that there will lot of foreign player coming to Indian market for direct
investment.
 Thirdly, the laws will also provide for insurance companies to list on stock exchanges,
which in turn will lead to barring public sector insurance companies, all other insurance
companies will potentially benefit from a higher FDI cap. So there might be a possibility
that public sector undertakings will face huge competition from the private sector
undertakings.
 Fourthly, there was huge cry in the Indian market that through this increase there will be
a situation wherein the Indian entities might lose control but the bill provides that
management must remain with India companies and the companies will have to go for
approval of the Foreign Investment Promotion Board (FIPB) will be needed on any
investment over 26 per cent.
  Fifthly there will be a huge inflow of money once the bill will be cleared in the
parliament, which will in turn, infuse a higher foreign direct investment limit in insurance
which could result in inflows of Rs. 40,000 crore to Rs. 60,000 crore over time, and
immediate inflows of around Rs. 20,000 crore.
 Sixthly the increase in the Cap will help to increase Infra Investment with the help of
private players or the foreign entities, in the Indian Market.
 Seventhly, with the increase in the cap, there will be enough chances to bring in new
technologies and products in the insurance market, which was not available during the
cap of 26%. Public Sector Undertakings were unable to provide enough chances to its
customers to invest in their various policies. But now due to increase in the cap, the
private entities will definitely provide new policies which will in turn bring lead to
opening up the Insurance sector.

Guidelines of IRDAI on FDI in Insurance Sector

Insurance Regulatory & Development Agency of India (IRDAI) has issued guidelines for the
insurance companies to bring in more transparency on the issue of compliance with the manner
ofIndian-ownedand-controlledcompanies. The guidelines have been issued in line with the
Insurance Laws (Amendment) Act 2015. As per the directive total foreign investment, both direct
and indirect holding, in an Indian insurance companycannotexceed49percent.

As per the Insurance Laws (Amendment) Act 2015, the foreign investment cap in the insurance
sector has been increased to 49 per cent from the earlier level of 26 per cent to accelerate growth
in the insurance sector. The new act also empowers the overseas reinsures to open branch offices
to carry out reinsurance business in India. The new law also requires the Indian promoter to
appoint or nominate majority of the directors, excluding independent directors, key management
person, including Chief Executive Officer or Managing Director or Principal Officer.

The IRDAI has further clarified that the new rules are also applicable to insurance intermediaries
such as brokers, third party administrators, surveyors and loss assessors. However, insurance
intermediaries who earn more than 50 per cent of its revenue from non-insurance business are
not bound by new rules. The most recent addition to the regulatory regime governing foreign
investment in Indian Insurers has been the Guidelines on "Indian owned and controlled"
(Guidelines) issued by the IRDAI by way of a Circular of 19th October 2015.

The Guidelines are applicable to Indian Insurers and insurance intermediaries. The salient
features of the Guidelines are as follows:

 The Guidelines have provided some much needed clarity on the aspect of 'Indian control'.
The term 'control' has been defined (in the Amendment Act) to include the right to
appoint a majority of the directors or to control the management or policy decisions
including by virtue of their shareholding or management rights or shareholders
agreements or voting agreements. The Guidelines, along similar lines, provide that
control can be exercised by the virtue of any one of more of the following: (a)
 Shareholding; or (b) Management rights; or (c) Shareholders agreements; or (d) Voting
agreements; or (e) Any other manner as per applicable laws.
 The majority of the Board of Directors, excluding independent directors, are to be
nominated by the Indian promoters/Indian investors.

 Key management persons including the CEO and the Principal Officer are to be
appointed by the Board of Directors or by the Indian promoters/Indian investors. Foreign
investors may nominate a key management person (excluding the CEO) but such key
management person will need to be approved by the Board of Directors.

 Control over "significant policies" should be exercised by an appropriately constituted

Board of Directors.

 In cases where the Chairman of the Board of Directors has a casting vote, the Chairman
will also need to be nominated by the Indian promoters/Indian investors.

 Valid quorum for a board meeting will be constituted with the presence of majority of the
Indian directors.

 The CEO and the Chief Companies Officer are required to file an undertaking with the
IRDAI conforming compliance with the 'Indian owned and controlled' criteria as set out
in the Guidelines.

CONCLUSION:
Increase the cap in Insurance Sector will definitely boost up the Indian Economy due to enlarge
scope of foreign players in the Indian Market. This will also help in increasing the employment
level in India. The Indian market will certainly recover from the poverty and other social
difficulties due to infusion of funds from the foreign countries. Insurance Sector will definitely
improve and it will help Indian population at large. Other players in the market will get the level
playing field across the whole India when it comes to Insurance and defence sector because as of
now only government companies are having monopoly in the above mentioned sector.

There will definitely be increase of cash flows from the private players which will lead to
development of Infrastructure and other important sectors. If tomorrow pension bill is passed in
the Indian Parliament, then FDI in the pension funds will also be raised to 49%. At last, the end
beneficiary of this amendment will be common men because due to more players in the market
there is bound to have competition leading to competitive quotes, improved services and
settlement ratio.

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