Foreign Investment Policies are for investing directly into production or business in a country by a company or an individual of another country. Investing may be buying a company in another country or by expanding operations of the existing business in that country.
Foreign Investment in India is governed by the FDI (Foreign Direct Investment) of the GOI (Government of India) and Foreign Exchange Management Act 1999.
The two main concerns of FDI policy framework are:
- To sustain India's impressive economic growth, foreign investments are necessary
- Protection of sectors which are of strategic interest such as defence and telecommunications.
The government has now allowed Foreign Institutional Investors (FII) and Non-Resident Indians (NRIs) to invest in the Insurance sector through automatic route within the 26% cap on FDI (Foreign Direct Investment). A senior official at DIPP (Department of Industrial Policy and Promotion) said that Foreign investment was already allowed in third-party administrators, insurance, insurance brokers as per the Insurance Act but now it has been defined in FDI policy. This shall attract more investors in the market.
The foreign investors would have to obtain the necessary licence from IRDA (Insurance Regulatory and Development Authority) for undertaking the activities of Insurance. Private sector banking FDI norms would be applicable for bank-promoted insurance companies. 74% FDI including investments by FIIs in private sector banks has been allowed by Banking sector FDI norms. In this sector, government route is followed from 49% to 74% and automatic route is followed up to 49%.
Most of the Insurance companies in the country are joint ventures between foreign and Indian companies. Due to political opposition, the government is unable to raise the FDI limit in the sector to 49%. The limit in case of Insurance sector is mentioned in the law so it would need to be raised through parliamentary process unlike most sectors where limits are mentioned in the policy of FDI.
It is a long-term commitment to invest in India as these changes have raised certain issues which need to be resolved further like a broader FDI policy and the narrow definition of ownership. The stability in government for the next five years signified by the near majority win by the ruling UPA government is a good news on the Indian front. To further liberalize the FDI policy over the next five years, the current government will continue its economic reform agenda.
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