Cabinet Okays proposal for 49% FDI in pension & insurance firms

The Congress-led UPA government has unveiled a second wave of reforms, approving proposals allowing foreign investors to own up to 49% in insurance firms and pension funds.

But the initiative may remain still born as BJP, the principal Opposition party, signalled its reluctance to back bills raising foreign investment limits.

Two other less contentious economic legislation one modernising the Companies Act and another, the forward contracts bill, empowering the regulator of commodities markets may fare better in Parliament.

Addressing a press conference on Thursday evening, Finance Minister P Chidambaram said the government will reach out to the Opposition parties. "I'm optimistic that the principal Opposition party will support. We should not jump to conclusions. Legislation-making process involves discussion and negotiation. There have been instances where a government that did not have absolute majority has got bills passed," he said, underscoring the difficulty the government faces.

"BJP will expand the fine print on the two bills. It stands committed to protect the interest of pensioners," BJP Spokesman Ravi Shankar Prasad said.

The standing committee on finance headed by Yashwant Sinha, a former finance minister in the NDA government, had proposed capping FDI at 26% in insurance and pension.

The government also approved the 12th Five-Year Plan and announced measures to operationalise infrastructure debt funds after a marathon cabinet meeting that deliberated on 21 items and seemed intended to convey a sense of purpose and determination after the policy paralysis that had characterised the first three years of UPA's second term in office.

The government will need the support of the Samajwadi Party (SP) and Bahujan Samaj Party (BSP) to ensure the passage of the insurance and pension bills.

Although the two parties have been making tough noises against the government's FDI decisions, they have in the past backed the government on the floor of Parliament.

"The Samajwadi Party has always opposed raising FDI cap in the insurance and pension sectors, but I really cannot comment on what it will do now. As of now, it is important for us to support the government against communal forces and we will take an appropriate stand when the time comes," said Mohan Singh, MP and general secretary of SP.

Expectedly, the Left lashed out at the decisions taken by the Cabinet. "We will oppose these decisions inside and outside Parliament," Gurudas Dasgupta, leader of CPI in the Lok Sabha, said.

In Kolkata, Trinamool Congress chief Mamata Banerjee described the decision as yet another demonstration of what she described as the Centre's "arrogance".

The cabinet's decision to raise the foreign equity cap on insurance to 49%, from 26% now, indicates that the ceiling will include all types of foreign investment, both by foreign insurers and portfolio investors. The pension sector will have the same rules as insurance.

These decisions, if approved by lawmakers, will give insurance and pension companies greater freedom in case they want to list on stock exchanges as they will be able to get foreign institutional investors to buy into them. If they wish to list, portfolio investors can only buy shares within the 26% cap.

The government also indicated it will allow public sector companies to list, but said it will maintain at least 51% stake. Economists were sceptical of these bills making it through Parliament, though industry cheered the move. "It re-establishes the government's commitment to reforms and gives a clear signal to foreign investors, but it needs to be seen how they are able to get them pushed in Parliament," said Abheek Barua, chief economist, HDFC Bank. Indian industry, which had been clamouring for a new push to reforms after last month's decision allowing FDI in multi-brand retail and partial reform of subsidies on diesel and cooking gas, cheered the move.

"This will add to the confidence of the nation and spur investments," said CII President Adi Godrej. "The new instalment of big-bang reforms is a clear message that the government is determined to strengthen the economy," said FICCI President RV Kanoria.

Private insurers see passage of the insurance bill enhancing the possibility of listing. "It will open up the possibility of listing and companies can evaluate the option as and when FDI is raised," said Puneet Nanda, executive director ICICI Prudential.

"For us, Prudential has the right to increase stake to 49% at the then prevailing market price but shareholders will take a call."

The other key legislation that were part of the Union cabinet's Thursday meeting included a nod to the Companies Bill, which makes it mandatory for companies to explain their stance in case they fail to comply with the norm of spending 2% of average net profit of the preceding three years on corporate social responsibility. The bill will also make independent directors more accountable and bring in greater clarity on private placement issues.

Changes to the competition act seeking to empower the Competition Commission of India to screen mergers and acquisitions in all sectors, including pharmaceuticals, and empowering it to fix sectoral thresholds were also approved.

Currently, it can scrutinise only those mergers & acquisitions in which the combined threshold of the parties involved amounts to at least Rs 1,500 crore in assets and Rs 4,500 crore in turnover.

However, an exemption was carved out if the amalgamation came about in case of the failure of a bank or insurance firm. In such cases, sectoral regulators RBI and Irda would have the right to force a bank or an insurance company to merge. The cabinet also cleared the long pending Forward Contract Regulation Act (FCRA) Amendment Bill, which will facilitate the entry of institutional investors and introduce commodity options and derivatives trading.

The bill also seeks to allow banks, mutual funds, and insurance companies to participate in commodity futures, which will bring greater depth to the market in terms of volume and price discovery.

"I do not make markets or intend to make markets," the finance minister said when asked about the reaction of stock markets on Friday to these reform measures.

This article was originally published in the Economic Times dated 5th October, 2012, Economic Times Bureau, New Delhi.