Foreign Direct Investment in Insurance Sector

FOREIGN DIRECT INVESTMENT IN INDIAN INSURANCE
INDEX:
CHAPTER TOPIC 1 2 3 4 5 6 7 INTRODUCTION TO INDIAN ECONOMY AND DIRECT INVESTMENT (FDI) TYPES OF FOREIGN INVESTMENTS (FDI & FPI), PG. NO. FOREIGN 1 4
MEANING, DEFINITION AND NOTES RELATED TO FDI FDI A HISTORICAL PERSPECTIVE IN INDIA 8 FDI IN INDIA AN OVERVIEW 11 INDIAN INSURANCE SECTOR INTRODUCTION, ROLE, 20 PRIVATISATION, OVERVIEW AND OPPORTUNITIES TYPES OF FDI TYPE OF FDI IN INDIAN INSURANCE SECTOR ENTRY ROUTES FOR FDI IN INDIA ENTRY ROUTES FOR FDI IN INDIAN INSURANCE SECTOR LIST OF FOREIGN ENTRANTS IN GENERAL & LIFE INS. FDI REGULATION IN INDIA FDI POLICIES INDIAS FEATURES AS A HOST COUNTRY FOR FDI AND BUSINESS COMPLAINTS ADVANTAGES AND DISADVANTAGES OF FDI ADVANTAGES OF FDI IN INDIAN INSURANCE EMERGING TRENDS IN INSURANCE DUE TO FDI / 28 35
8 9 10 11 12 13 14
39 41 44 51 56
(POSITIVE IMPACTS OF FDI) GOVERNMENT PROPOSAL TO LIFT FDI CAP TO 49% IN 63 INDIAN INSURANCE IMPACT OF FDI AND LIBERALISATION ON INSURANCE SECTOR / (NEGATIVE IMPACTS OF FDI) AS SUBMITTED BY LEFT PARTIES TO UPA CONCLUSION 64
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PHASES OF INDIAN ECONOMY POST 2000: Political Coalitions have started providing stable governments.
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Government to get out of owning and managing businesses: Disinvestment Policy. Gradual relaxation in the FDI Policy.
TYPES OF FOREIGN INVESTMENT: Capital flows come in three primary forms:
Portfolio equity investment, which involves buying company shares, usually through stock markets, without gaining effective control. Portfolio debt investment, which typically covers bonds and short- and longterm borrowing from banks and multilateral institutions, such as the World Bank.
Foreign direct investment
(FDI), which involves forging long-term
relationships with enterprises in foreign countries.
DIFFERENCE B/W FDI AND PORTFOLIO INVESTMENT: FDI Investment in physical assets Tends to be long term Difficult to withdraw Does not tend be speculative Expectation of technology transfer Foreign Portfolio Investment (FPI) Investment in financial assets Tends to be short term Easy to withdraw Tends to be speculative No Expectation of technology transfer
Direct impact on employment of labour No direct impact on employment of and wages labour and wages

Abiding interest in management. Fleeting interest in management.
FOREIGN DIRECT INVESTMENT (FDI) - MEANING: FDI refers to an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. Further, in cases of FDI, the investors purpose is to gain an effective voice in the management of the enterprise. The foreign entity or group of associated entities that makes the investment is termed the "direct investor". The unincorporated or incorporated enterprise-a branch or subsidiary, respectively, in which direct investment is made-is referred to as a "direct investment enterprise". Some degree of equity ownership is almost always considered to be associated with an effective voice in the management of an enterprise. Once a direct investment enterprise has been identified, it is necessary to define which capital flows between the enterprise and entities in other economies should be classified as FDI. Since the main feature of FDI is taken to be the lasting interest of a direct investor in an enterprise, only capital that is provided by the direct investor either directly or through other enterprises related to the investor should be classified as FDI. The forms of investment by the direct investor which are classified as FDI are equity capital, the reinvestment of earnings and the provision of long-term and short-term intra-company loans (between parent and affiliate enterprises). A direct investment enterprise is an incorporated or unincorporated enterprise in which a single foreign investor either owns 10 per cent or more of the ordinary shares or voting power of an enterprise (unless it can be proven that the 10 per cent ownership does not allow the investor an effective voice in the management) or owns less than 10 per cent of the ordinary shares or voting power of an enterprise, yet still maintains an effective voice in management. An effective voice in management only implies that direct investors are able to influence the management of an enterprise and does not imply that they have absolute control. The most important characteristic of FDI, which distinguishes it from foreign portfolio

investment, is that it is undertaken with the intention of exercising control over an enterprise.
DEFINITION: Foreign direct investment (FDI) is defined as "investment made to acquire lasting interest in enterprises operating outside of the economy of the investor." The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. In other words, FDI refers to Net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor. It is a sum of equity capital, reinvestment of earnings other than long term capital and short term capital as shown in the balance of payment. According to WTO, Foreign Direct Investments (FDI) occurs when an investor based in one country (home country) acquires an asset in another country (host country) with the intent to manage that asset. The management dimension is what distinguishes FDI from Portfolio Investment in foreign stocks, bonds and other financial instruments because the PI has no intent about managing the asset.
IMPORTANT NOTES RELATED TO FDI: FDI does not necessarily imply control of the enterprise, as only a 10 percent ownership is required to establish a direct investment relationship. FDI does not comprise a 10 percent ownership (or more) by a group of unrelated investors domiciled in the same foreign countryFDI involves only one investor or a related group of investors. FDI is not based on the nationality or citizenship of the direct investorFDI is based on residency. Borrowings from unrelated parties abroad that are guaranteed by direct investors are not FDI.
FDI - A HISTORICAL PERSPECTIVE IN INDIA: It is misleading to suggest that India is new to foreign capital. Foreign capital had a substantial presence in Indian industry prior to 1947, and was mostly concentrated in the primary sectors and services. Foreign firms, mostly British, dominated Indias mining, plantations, trade and much of the fledgling manufacturing base. Further FDI flows played an important role in the early post- Independence years, as India turned abroad for both technology and capital. By the late 1950s, the Indian government invited foreign capital in many sectors, including pharmaceutical drugs, aluminium, heavy electricals and chemicals. During the 1960s inflows concentrated on manufacturing, especially the technologyintensive industries. By the end of the 1960s, around 60 per cent of all foreign direct capital was concentrated in the manufacturing industries. However, in the aftermath of two famines and the devaluation of the Rupee in the 1960s, there was a hardening of policy. Foreign oil majors were nationalized in the early 1970s. The government did not rule out new foreign investment but now wanted it on restrictive terms. The Foreign Exchange Regulation Act (FERA) of 1973 introduced a clause that required firms to dilute their foreign equity holdings to 40 per
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cent if they wanted to be treated as Indian companies. There were new restrictions on technology imports, with a preference for licensing over financial collaboration, and restricted rates of royalty payment. Intellectual property rights were severely curtailed by a revised Patents Act in 1970: product patents were abolished in industries such as pharmaceuticals and chemicals. By the mid-1980s, growing concern about stagnation and technological
obsolescence in Indian industry led to a push for economic reform and deregulation. To encourage exports, export-intensive firms were granted exemptions from the usual FERA limits on foreign equity ownership. In an attempt to modernise manufacturing industry, restrictions on technology transfers and royalty payments were relaxed. However, despite official claims, foreign investment projects were still very vulnerable to bureaucratic discretion. Foreign equity inflows remained paltry and, to a large extent, Indian industry came to rely on foreign debt capital to meet its foreign exchange needs. The 1990s began with a major crisis. In the wake of the Gulf War, and the consequent expulsion of Indian expatriate labour from the Middle-East, foreign exchange remittances fell. As the balance of payments position deteriorated, a panicked withdrawal of funds deposited in India by Non Resident Indians exacerbated the problem. The real possibility that India might default on its external obligations led to a downgrading of Indias credit rating. As part of the reforms agreed with the IMF, the Rupee was devalued, and fresh attempts were made to liberalise the trade regime and the regulatory framework. Industrial licensing was abolished in all but a handful of industries. Foreign direct investment was now permitted in many sectors from which foreign capital had been excluded in the past. These included the infrastructure sectors previously monopolised by state enterprises: power generation, highway and port construction, telecommunications, oil and natural gas exploration. The services sector, where foreign capital had been eliminated as a matter of deliberate policy, was reopened: fresh investment was approved in financial services, retail banking, insurance, and recently in the media and retailing. The cap on foreign equity participation was raised to 51 per cent for most industries, and even 100 per certain some cases. Restrictions
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on the use of international brand names were removed. Reforms in the technology policy provided greater recognition of intellectual property rights. On the whole, in the nearly six decades since Independence, policy towards private foreign capital has moved closely with exigencies of Indias external payments position. Nevertheless the changing policy environment had a direct effect on the extent of foreign capital in Indian industry and its contribution to the economy. Athreye and Kapur (2001) studied the long-term relative performance of multinational and domestic firms in India, using company-level data collected by the Reserve Bank of India. They found that multinationals were dominant in many sectors (electricals, chemicals, rubber, cigarettes, aluminium, automotive components) even during the restrictive phase. They found that foreign-controlled firms had higher profit margins than domestic firms throughout the period, possibly due to their technological strength, access to global marketing networks and brand names that gave them a clear edge over domestic firms.
FOREIGN DIRECT INVESTMENT IN INDIA AN OVERVIEW:
Liberalization of the Indian economy in the early 1990s boosted the inflow of Foreign Direct Investments (FDI) to India. It also helped to open Indian markets to foreign direct investment. Further the government of India simplified the procedures for foreign direct investment in the country in order to encourage the foreign investors to invest in the country. Foreign direct investment in India, came from non resident Indians, international companies, and other foreign investors. FDI inflows to India grew significantly over the years and assumed significant importance. INDIAS INCREASING FDI INFLOW:
Notwithstanding to the global financial credit squeeze, resulting into the liquidity crunch, India has witnessed the unforeseen increase in the foreign direct investment(FDI), which has shoot up by 259 per cent to reach at $2.56 billion as compare to previous year. As per the official statement issued by the government, the foreign direct investment inflows has registered at $17.21 billion, which is the rise of over 137 per cent at $7.25 billion, of the same period in the last year. The Union Commerce and Industry Minister, Kamal Nath has asserted that "Despite troubles in the world economy, India continued to attract FDI and the target of $35 billion
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for 2008-09 fiscal would be achieved."
The graph besides shows that the flow of foreign direct investment in India has grown at a very fast pace over the last few years. The various forms of foreign capital flowing into India are NRI deposits, investments in the commercial banks of India, and investments in the country's debt and stock markets.
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COUNTRY SOURCES OF FDI IN INDIA:
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COMMENTS:
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Mauritius cornering a huge chunk ( approx. 44%) of total FDIs into India is a direct consequence of the Indo-Mauritius Double Taxation Avoidance Treaty (DTAT) signed in 1982, under which Mauritian companies are exempted from income tax on capital gains made on investments in India. Expectedly, 2nd and 3rd spots are occupied by the Singapore (8.04%) and United States (7.58%); this demands little explanation beyond stating the fact of abundant availability of surplus, investible funds in these economies.
FDI WITHIN INDIA:
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COMMENTS: Unsurprisingly, Maharashtra mostly Mumbai and Delhi are the most favoured destinations for FDIs. They are followed by two other states with prominent metropolitan cities & financial hubs, viz. Karnataka (Bangalore) and Tamil Nadu (Chennai). TOP 5 DESTINATIONS OF APPROVED FDI AMONG INDIAN: State Maharashtra Delhi Karnataka Tamil Nadu Gujarat Others No. of FDIs Approved 2015 1226 1078 1223 458 3119 Approved FDI ($ Million) 11135.9 9226.7 5247.1 5073.8 3129.6 19476.4
SECTOR WISE FDI IN INDIA:
14
COMMENTS:
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The service sector topped the list (21.68%), which have successfully able to attract more than $2.34 billion foreign investment. The FDI Inflows to Service Sector has helped the development of several industries in the service sector of the Indian Economy. This includes mainly Financial services (Insurance and banking) and Tele Communication, Hotel &Tourism,etc. Since the onset of the liberalization of the Indian economy in 1991, the country has experienced a huge increase in the inflow of Foreign Investments. The service sector in India has tremendous growth potential and as such it has attracted huge Foreign Direct Investments (FDI).
SECTORS OFINDIAN ECONOMY: 1990 2007
Indian service sector has grown tremendously in the last few years. Today it has been globally recognized for its high growth and development. The fact that in the last 5 years this sector has been growing at an annual rate of about
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28 % speaks volumes of its success. At the moment service sector contributes nearly 55% of India's GDP. The government of India is taking major steps to give a boost to this sector. The service sector also contributes heavily on India's foreign exchange. By 2012, it is expected that service exports is also going to be around 6% by 2012, if the annual growth rate of 28% is maintained.
SOME REASONS FOR HUGE FDI IN SERVICE SECTOR ARE: skill intensive and high value-added services industries low costs deep technical and language skills Mature vendors and supportive government policies. Services Location. Availability of skilled workforce and business environment.
SERVICE SECTORS WITH HIGH FDI FLOWS IN INDIA: The major service sectors of the Indian economy that have benefited from FDI in India are:

Financial sector (banking and non-banking). Insurance Telecommunication Hospitality and tourism Pharmaceuticals Software and Information Technology.
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FDI in India has increased over the years due to the efforts that have been made by the Indian government. The increased flow of FDI in India has given a major boost to the country's economy and so measures must be taken in order to ensure that the flow of FDI in India continues to grow.
REASONS FAVORING FDI IN INSURANCE: Experience of other countries shows that insurance has attracted significant FDI. FDI would bring technical know-how and skill. It would speed up the growth of insurance sector by setting up new distribution channels, IT etc. Joint ventures would ease capital constraints of existing insurance players. Domestic insurers would get access to global best management practices. Sourcing from India would increase. There will be more investment Competition would drive down prices (premiums). Protection leads to inefficiency. FDI would lead to development of different and innovative products.
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INTRODUCTION TO INDIAN INSURANCE SECTOR:
The insurance sector in India has come a full circle from being an open competitive market to nationalization and back to a liberalized market again. Tracing the developments in the Indian insurance sector reveals the 360-degree turn witnessed over a period of almost 190 years. The life insurance business, which started in 1818 with the establishment of the Oriental Life Insurance Company of Calcutta, was nationalized in 1956 when the central government took over 245 Indian and foreign insurers and provident
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societies. Additionally, the LIC was formed by an Act of Parliament (LIC Act 1956), with a capital contribution of Rs 50 m from the Indian government. The general insurance business in India started with the formation of the Triton Insurance Company Ltd of Calcutta in 1850. This was also nationalized, although much later than the life insurance sector, with effect from January 1, 1973. In 1973, 107 general insurers were amalgamated and incorporated into the General Insurance Corporation of India ('GIC'), which had four subsidiaries - the National Insurance Company Ltd, the New India Assurance Company Ltd, the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. These four subsidiaries were spun off from the parent as independent companies in 2000, when the government liberalized the insurance sector, both life and general, bringing the private sector back into the market. Additionally, GIC was designated the national re-insurer.
At this time, the government also allowed foreign players into the market . With this the concept of Foreign Direct Investment (FDI) in Indian Insurance sector came into picture.
Foreign Direct Investment or FDI is the investment in a country by some foreign country. It is usually a physical investment like building a factory or an office. It usually includes a parent company (from home country), who in the effort of expanding establishes its office as a permanent company in a foreign country. In this way the parent company gets the level of Multinational Company and its investment is known as FDI for the host country. Importance of expansion is very necessary for all nature of businesses to sustain long term survival but FDI is very important for the host country as well. For example, developing countries are the most attractive growing markets for almost all kinds of businesses
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therefore; if a company makes FDI in developing country then it will give benefit to the company and the country both. Benefits usually increase high profits for the company, and increase in employment, economic growth etc. for the country. In addition to that there are a number of risks which are always there in FDI for both the country and the company. The Indian insurance industry currently comprises 28 players 14 each in the life and non-life business sectors, of which only five (all Indian private sector players, though in joint ventures with different foreign partners) are involved in both the life and non-life business.
ROLE OF INSURANCE SECTOR: Insurance industry in todays uncertain environment has assumed paramount importance. Today people have become very conscious about their future and so they are spending nearly 6 times on life insurance than they did before . The number of life insurance policies in India is the largest in the world and this sector contributes nearly 4 % in the GDP. The Indian insurance companies recorded a growth nearly 20% in premium in dollar terms, compared to the world market growth rate 0f only 3%. Insurance would assist businesses to operate with less volatility and risk of failure and provide for greater financial and societal stability from the growth pangs of an estimated growth rate over 8 % in GDP
Government has arranged for disaster management and for funds. NGOs and public institutions assist with fund raising and relief assistance. Besides government provides for social security programs. There is considerable impact upon government in these respects. Insurance substantially steps in to provide these services. The effect would be to
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reduce the strain on the tax payer and assist in efficient allocation of societal resources
Facilitates trade, business and commerce by flexible adaptation to changing risk needs particularly of the mushrooming Services sector.
Like any other financial institution insurance companies generate savings from the insurance sector within the economy and make available the same in well directed areas of the economy deserving investments ; a sector with potential for business as is the case with Indian insurance provides incentive to develop it all the more faster
It enables risk to be managed more efficiently through risk pricing and risk transfers and this is an area which provides unlimited opportunities in the Indian context for consulting, broking and education in the postprivatization phase with newer employment opportunities
The insurance industry of its own accord is interested in loss minimization. Its expertise in understanding losses assists it to share the experience across the economy thus enabling better loss control and preservation of national assets
In its risk pricing and investment decisions the insurance industry sets the tone for investment by others in the economy. Informed assessment by the insurance companies thus signals allocation of resources by others contributing to efficiency in allocation. In India visibility of LIC and GIC have been dwarfed by governments actions and other high profile institutions like ICICI, IDBI and UTI. Of late AIG is visible in the media and its investment announcements are being followed keenly by institutional investors in India. ING Savings Trust and Zurich are active in asset management and are being keenly followed by retail investors.
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PRIVATISATION OF INSURANCE SECTOR: Insurance is the fastest growing sector in India since 2000 as Government allowed Private players and FDI up to 26%. Life Insurance in India was nationalised by incorporating Life Insurance Corporation (LIC) in 1956. All private life insurance companies at that time were taken over by LIC. In 1993 the Government of Republic of India appointed RN Malhotra Committee to lay down a road map for privatisation of the life insurance sector. While the committee submitted its report in 1994, it took another six years before the enabling legislation was passed in the year 2000, legislation amending the Insurance Act of 1938 and legislating the Insurance Regulatory and Development Authority Act of 2000. The same year that the newly appointed insurance regulator - Insurance Regulatory and Development Authority IRDA -- started issuing licenses to private life insurers.
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INDIAN INSURANCE INDUSTRY - OVERVIEW AND OPPOTUNITIES: OVERVIEW: SIZE: Insurance is a US$41-billion industry in India, and grew by 36% in 2006-07 over the previous year o Life Insurance - US$35 billion industry with US$24 billion accounting for First Year Premium (inclusive of Single Premium) o Non-Life Insurance - US$5.6-billion industry; motor and health segments account for 56% of total business
STRUCTURE:
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Indian Insurance market was opened to private and foreign investment in 1999-2000 The Indian Insurance industry consists of a total of 34 players
o o
Life: 1 public sector player; 16 private players Non-life: 6 public sector players; 11 private players
Major international players like AIG, Aviva, MetLife, New York Life, Prudential, Allianz, Sun Life, Standard Life and Lombard are already present with minority stakes in joint ventures with Indian companies for both Life and Non-life segments
The Life Insurance market is still dominated by Life Insurance Corporation (LIC) - a public sector company which had 75% share of first year premium in 2006-07
In non-life, private sector companies (almost all are joint ventures with foreign insurers) accounted for 34% of the market in 2006-07
POLICY:
FDI up to 26% is permitted under the automatic route subject to obtaining a license from the Insurance Regulatory and Development Authority (IRDA) o Intention to increase FDI up to 49%
Insurance Regulatory Development Authority (IRDA) is the regulator for the Insurance industry
In a landmark move the government detariffed the General Insurance business on 1st January, 2007
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OPPORTUNITY:
Many
international
players
have
entered the Indian Insurance market
Non-Life penetration is low in India - a potential growth area of the future
OUTLOOK: The Indian Insurance market is expected to be around US$52 billion by 2010 o Expected CAGR of over 30% p.a. POTENTIAL:
Largely untapped market with 17% of the worlds population

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o
Nearly 80% of the Indian population is without Life, Health and Non-life insurance
o o o
Life Insurance penetration is low at 4.1% in 2007-08 Non-life penetration is even lower at 0.6% in 2007-08 The per capita spend on Life and Non-Life Insurance is US$33.2 and US$5.2 (2006-07), respectively compared to a world average of US$330 and US$224
Strong economic growth with increase in affluence and rising risk awareness leading to rapid growth in the insurance sector
Innovative products such as Unit Linked Insurance Policies are likely to drive future industry growth
Investment opportunities exist in both life and non-life segments

o
Total estimated investment opportunity of US$14-15 billion
TYPES OF FDI:
1. BY DIRECTION:
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a. Inward Inward foreign direct investment is when foreign capital is invested in local resources. b. Outward Outward foreign direct investment, sometimes called "direct investment abroad", is when local capital is invested in foreign resources. 2. BY TARGET: a. Greenfield investment It is the direct investment in new facilities or the expansion of existing facilities. It is the principal mode of investing in developing countries. Greenfield investments are the primary target of a host nations promotional efforts because they create new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the global marketplace. The Organization for International Investment cites the benefits of Greenfield investment (or insourcing) for regional and national economies to include increased employment (often at higher wages than domestic firms); investments in research and development; and additional capital investments. Criticism of the efficiencies obtained from Greenfield investments includes the loss of market share for competing domestic firms. Another criticism of Greenfield investment is that profits are perceived to bypass local economies, and instead flow back entirely to the multinational's home economy. Critics contrast this to local industries whose profits are seen to flow back entirely into the domestic economy. b. Mergers and Acquisitions It occurs when a transfer of existing assets from local firms takes place; the primary type of FDI. Cross-border mergers occur when the assets and operation of firms from different countries are combined to establish a new legal entity. Cross-border acquisitions occur when the control of assets and operations is transferred from a local to a foreign company, with the local company becoming an affiliate of the foreign company. Unlike greenfield investment, acquisitions provide no long term benefits to the local economy-- even in most deals the owners of the local firm are
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paid in stock from the acquiring firm, meaning that the money from the sale could never reach the local economy. Nevertheless, mergers and acquisitions are a significant form of FDI and until around 1997, accounted for nearly 90% of the FDI flow into the United States. Mergers are the most common way for multinationals to do FDI. c. Horizontal FDI Investment in the same industry abroad as a firm operates in at home. d. Vertical FDI Backward Vertical FDI Where an industry abroad provides inputs for a firm's domestic production process. Forward Vertical FDI Where an industry abroad sells the outputs of a firm's domestic production. 3. BY MOTIVE FDI can also be categorized based on the motive behind the investment from the perspective of the investing firm: a) Resource-Seeking Investments which seek to acquire factors of production that are more efficient than those obtainable in the home economy of the firm. In some cases, these resources may not be available in the home economy at all (e.g. cheap labour and natural resources).
b) Market-Seeking Investments which aim at either penetrating new markets or maintaining existing ones. FDI of this kind may also be employed as defensive strategy; it is argued that
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businesses are more likely to be pushed towards this type of investment out of fear of losing a market rather than discovering a new one. This type of FDI can be characterized by the foreign Mergers and Acquisitions in the 1980s Accounting, Advertising and Law firms. c) Efficiency-Seeking Investments which firms hope will increase their efficiency by exploiting the benefits of economies of scale and scope, and also those of common ownership. It is suggested that this type of FDI comes after either resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm. Typically, this type of FDI is mostly widely practiced between developed economies; especially those within closely integrated markets. d) Strategic-Asset-Seeking A tactical investment to prevent the loss of resource to a competitor. Easily compared to that of the oil producers, whom may not need the oil at present, but look to prevent their competitors from having it.
OTHER TYPES OF FDI: 1. WHOLLY OWNED SUBSIDIARY: A Wholly Owned Subsidiary is an entity that is controlled completely by another entity. The controlled entity is called a company, corporation, or limited liability company, and the controlling entity is called its parent (or the parent company). The reason for this distinction is that an individual cannot be a subsidiary of any organization; only an entity representing a legal fiction as a separate entity can be a subsidiary. While individuals have the capacity to act on their own initiative, a business entity can only act through its directors, officers and employees. The most common example of a wholly owned subsidiary in India is LG that was set up in 1997 as LG EIL (LG Electronics India Ltd.) Sectors for FDI up to 100% in form of wholly owned subsidiaries:
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Most manufacturing activities, Non-banking financial services, Drugs and pharmaceuticals, Food processing, Electronic hardware, Health related & social services, etc. 2. JOINT VENTURES: A large number of recent foreign investments in most countries are associated with joint venturing with local entrepreneurs. Joint Venture is coming together of two or more corporations to form a new corporation. The classic example in case of India context is the JV between ICICI Prudential Life Insurance : ICICI Prudential Life Insurance Company is a joint venture between ICICI Bank - one of India's foremost financial services companies - and Prudential plc - a leading international financial services group. Sectors for FDI in form of Joint Ventures: Insurance Industry, Car industry, etc.
TYPE OF FDI IN INDIAN INSURANCE INDUSTRY:

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JOINT VENTURES: In certain sectors having a joint venture (JV) is a must for making an entry into India as 100% investment is not allowed in these sectors. Insurance is such type of sector in India. JV offer a low risk option to entering a newer market like India. JV provides the partners an opportunity to leverage their core strengths. Most private insurers in India are through Joint Ventures. ADVANTAGES OF JOINT - VENTURE: maximizing profit while minimizing risk Limited liability Market Penetration sharing of resources allowing host country to gain technology and create jobs circumventing trade barriers local Partners Expertise and Experience local partner's political connections DISADVANTAGES OF JOINT VENTURE: conflict with partner sharing of profit loss of control difficulty in terminating relationship VITAL CONSIDERATIONS FOR JOINT - VENTURE:
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Choice of Joint Venture Partner Clearly defined agreement Terms of the Shareholders Agreement Share Transfer Restriction Non-disclosure of confidential information post termination
FOREIGN ENTRANTS / JOINT VENTURES IN INDIAN INSURANCE:
LIST OF PRIVATE COMPANIES IN GENERAL
INSURANCE:
Name of the Private Insurance Company
General Per cent Foreign Equity
ofName of the Foreign partner Royal Sun Alliance
Royal Sundaram Alliance Insurance 26 Co. Ltd Reliance General Insurance Co. Ltd Nil
IFFCO-Tokio General Insurance Co. 26 Ltd Tata-AIG General Insurance Co. Ltd 26
Tokio Marine AIG Allianz Lombard
Bajaj Allianz General Insurance Co. 26 Ltd ICICI Lombard General Insurance Co. 26 Ltd Cholamandalam General Insurance Nil Co. Ltd HDFC-CHUBB General Insurance Co. 26
CHUBB
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Ltd
FOREIGN ENTRANTS / JOINT VENTURES IN INDIAN INSURANCE: LIST OF PRIVATE COMPANIES IN LIFE
INSURANCE:
Name of the Private Life Insurance Per cent ofName of the Foreign Company Foreign partner Equity Allianz Bajaj Life Insurance Co. Ltd. Birla Sun Life Insurance Co. Ltd. 26 26 Allianz Sunlife Standard Life Prudential ING New York Life Metlife
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HDFC Standard Life Insurance Co. 18.60 Ltd. ICICI Prudential Life Insurance Co. 26 Ltd. ING Vysya Life Insurance Co. Ltd. 26
Max New York Life Insurance Co. 26 Ltd. MetLife India Insurance Co. Ltd. 25.99
Om Kotak Mahindra Life Insurance 26 Co. Ltd. SBI Life Insurance Co. Ltd. Tata-AIG Life Insurance Co. Ltd. AMP Sanmar Life Insurance Co. Ltd. Dabur-CGU Life Insurance Co. Ltd. 26 26 26 26
Old Mutual Cardiff AIG Sanmar Insurance Co. Life
CGU Life Assurance Company
ENTRY ROUTES FOR FOREIGN DIRECT INVESTMENT (FDI) IN INDIA:
INVESTING IN INDIA ENTRY ROUTES:
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1) AUTOMATIC ROUTE: No prior Government approval is required if the investment to be made falls within the sectoral caps specified for the listed activities. Only filings have to be made by the Indian company with the concerned regional office of the Reserve Bank of India (RBI) within 30 days of receipt of remittance and within 30 days of issuance of shares The Entry Process: Automatic Route All items/activities for FDI investment up to 100% fall under the Automatic Route except the following: o All proposals that require an Industrial License. o All proposals in which the foreign collaborator has a previous venture/ tie up in India o All proposals relating to acquisition of existing shares in an existing Indian Company by a foreign investor. o All proposals falling outside notified sectoral policy/ caps or under sectors in which FDI is not permitted.
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2) PRIOR PERMISSION: FIPB ROUTE: Investment proposals falling outside the automatic route would require prior Government approval. Foreign Investment requiring Government approvals are considered and approved by the Foreign Investment Promotion Board (FIPB). Decision of the FIPB usually conveyed in 4-6 weeks. Thereafter, filings have to be made by the Indian company with the RBI. FIPB Approval o For all activities, which are not covered under the Automatic Route o Composite collaboration o Published Transparent Guidelines vs. Earlier Case by Case Approach approvals involving foreign investment/ foreign technical
CCFI ROUTE: Investment proposals falling outside the automatic route and having a project cost of Rs. 6,000 million or more would require prior approval of Cabinet Committee of Foreign Investment (CCFI). Decision of CCFI usually conveyed in 8-10 weeks. Thereafter, filings have to be made by the Indian company with the RBI. o Investment proposals falling within the automatic route and having a project cost of Rs. 6,000 million or more do not require to be approved by CCFI SERVICES SECTOR WITH 100% FDI UNDER AUTOMATIC ROUTE: Advertising and films, Computer related services, Research and development services, Construction and related engineering services, Pollution control and Management services, Urban Planning and Landscape services, Architectural services, Health related and social services, Travel related services, Road transport services, Maritime transport services, Internal waterways transport services SERVICE SECTORS WITH RESTRICTIONS ON FDI:
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Sectors with limits on FDI Caps Private Banking (49%) Insurance (26%) Domestic Airlines (40%) Basic and mobile services (49%) Print Media (26%) Defence production (26%)
SECTORS WHERE FDI IS PROHIBITED: Gambling, betting, lottery; Retail Trade; Agriculture Plantation, except tea plantation
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ENTRY ROUTES FOR FDI IN INDIAN INSURANCE SECTOR: FDI up to 26% allowed on the automatic route However, license from the Insurance Regulatory & Development Authority (IRDA) has to be obtained There is a proposal to increase this limit to 49%
In the insurance industry, foreign investment was first permitted in 2000, with the lifting of the Indian state-owned insurance companys monopoly, allowing competition from both domestic and foreign-owned private firms. During the 200001 fiscal year, 16 privately owned firms entered the Indian market, most as 26 percent joint ventures between globally competitive foreign insurers and Indian firms.
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FDI REGULATION IN INDIA:
Although Indian business regulation principally falls under the jurisdiction of federal law, state governments are empowered to design and regulate their own FDI policies. Consequently, the regulatory burden on foreign investors tends to be higher at the state level where application and approval procedures can vary widely across states. Moreover, FDI projects already approved at the central government level tend to bottleneck as they proceed since nearly 70 percent of the approvals and applications needed for eventual FDI implementation are obtained from state governments. State-level impediments to FDI can be severe, to the point that companies have been known to abandon FDI projects mid-way through implementation due to issues such as onerous zoning, land-use, and environmental regulations. In addition to difficult compliance procedures, such as the example mentioned, regulatory burden can take other forms in India. These can include long delays in getting new connections from public sector utilities, frequent visits by government inspectors, and the payment of bribes to avoid bureaucratic red tape. As a result, the federal government has made efforts to establish independent regulators in sectors such as insurance (IRDA), telecommunications and securities (SEBI) in order to streamline supervision below the federal level.
Many economists in the country have now realized the advantages of FDI to India. While the achievements of the Indian government are to be lauded, a willingness to attract FDI has resulted in what could be termed an FDI Industry. While researching the economic reforms on FDI, it was discovered that there exists a plethora of boards, committees, and agencies that have been constituted to ease the flow of FDI. A call to one agency about their mandate and scope usually results in the quintessential response to call someone else. Reports from FICCI and the Planning Commission place investor confidence and satisfaction at an all time high; citizens too deserve to be clued in on the government bodies are doing.
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The four major bodies that have been constituted and could provide data pertaining to FDI are: 1991 FOREIGN INVESTMENT PROMOTION BOARD (FIPB): Consider and recommend Foreign Direct Investment (FDI) proposals, which do not come under the automatic route. It is chaired by Secretary Industry (Department of Industrial Policy & Promotion). 1996 FOREIGN INVESTMENT PROMOTION COUNCIL (FIPC): Constituted under the chairmanship of Chairman ICICI, to undertake vigorous investment promotion and marketing activities. The Presidents of the three apex business associations such as ASSOCHAM, CII and FICCI are members of the Council. 1999 FOREIGN INVESTMENT IMPLEMENTATION AUTHORITY (FIIA): Functions for assisting the FDI approval holders in obtaining various approvals and resolving their operational difficulties. FIIA has been interacting periodically with the FDI approval holders and following up their difficulties for resolution with the concerned Administrative Ministries and State Governments. 2004 INVESTMENT COMMISSION: Headed by Ratan Tata, this commission seeks meetings and visits industrial groups and houses in India and large companies abroad in sectors where there was dire need for investment.
INSURANCE
REGULATORY
AND
DEVELOPMENT
AUTHORITY
(IRDA):
FDI in Indian Insurance is allowed up to 26% through automatic route. However, license from IRDA has to be obtained as IRDA being apex regulating institution for Insurance Sector in India.
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FOREIGN DIRECT INVESTMENT POLICIES: Foreign direct investment (FDI) has become a key battleground for emerging markets and some developed countries. Government-level policies are needed to enable FDI inflows and maximize their returns for both investors and recipient countries. Foreign direct investment (FDI) policies play a major role in the economic growth of developing countries around the world. Attracting FDI inflows with conductive policies has therefore become a key battleground in the emerging markets. Developed countries also seek to bring in more FDI and use various policies and incentives to attract overseas investors, particularly for capital-intensive industries and advanced technology. The primary aim of these policies is to create a friendly business environment where foreign investors feel comfortable with the legal and financial framework of the country, and have the potential to reap profits from economically viable businesses. The prospect of new growth opportunities and outsized profits encourages large capital inflows across a range of industry and opportunity types. Investors tend to look for predictable environments where they understand how decision-making processes work. Governments therefore are incentivized to build up a track record of rational decision making. The business environment often requires work to remove onerous regulations, reduce corruption and encourage transparency. Governments often also seek to improve their domestic infrastructure to meet the operational needs of investors. Providing fiscal incentives for attracting FDI is a subject of controversy analysts have argued both in favor and against the idea. A general consensus is developing in favor of certain incentives which have been proven historically to grow profits and therefore foreign investments. When policies are effective, significant FDI investments are injected into countries that help the domestic economy to grow. Different countries and regions offer various kinds of fiscal incentives, with a related variance in the level of FDI investments attracted. Governments are increasingly setting up promotional agencies to foster foreign direct investment. These agencies promote FDI-friendly policies, identify prospective sectors and investors, and structure specific deals and incentives for major foreign investors such as multi-national corporations (MNCs). Global trade associations also play a major role in some of these investment activities. These associations are tasked with creating a positive environment for foreign direct investors and ensuring that both investors and recipient countries enjoy a favorable environment.
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The formation of human capital is vital for the continued growth of FDI inflows. To enable the most beneficial, technology and IP-driven FDI, highly skilled personnel are necessary. Governments must therefore enact policies to provide training and skills upgrading to develop their workforce and meet the employment needs of foreign investors. A GOVERNMENT KEEN TO ENSURE FDI SHOULD FOLLOW THE FOLLOWING POINTS: Clear the way for free entry and exit in domestic markets by creating competition in products, services and labor markets and incentives to upgrade productivity and to prevent exploitation of consumers, employees and workers. Promote education, employee training, and infra Structure to increase domestic capacity to absorb and diffuse good new practices introduced by foreign investors. Create a policy framework that encourages the adoption of appropriate social and environmental standards in corporate practices. INSURANCE AND STEPS TAKEN BY GOVERNMENT TO PROMOTE
INSURANCE SECTOR: The Indian Insurance sector is having a dream run. Today people have become very conscious about their future and so they are spending nearly 6 times on life insurance than they did before. The number of life insurance policies in India is the largest in the world and this sector contributes nearly 4 % in the GDP. The Indian insurance companies recorded a growth nearly 20% in premium in dollar terms, compared to the world market growth rate 0f only 3%. According to a study, the life insurance market premiums is like to be around US$100 billion by 2012, and its contribution to GDP is likely to rise by 6%. The general Insurance Company has also grown to nearly 12% in 2007. Meanwhile the government has also taken few measures to boost this industry. Some of such measures are:
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FDI up to 26% has been permitted. Some state governments have also taken the initiatives to promote this sector. The government of Andhra Pradesh has decided to issue health cards to 18 million people living below poverty lines. As a result nearly 60 million people of the state will have insurance cover. INSURANCE SECTOR RECOMMENDATIONS: There is scope for greater FDI inflow in the insurance sector if the cap of 26 per cent foreign equity is raised. The experience of opening up of this sector to FDI has set at rest the fears that were expressed earlier regarding the effect of such opening. The public insurance monopolies have responded to private entry by trying to increase their efficiency and effectiveness. This process would be enhanced and sustained by more effective competition. The regulatory system is in place and the Insurance Regulatory Authority (IRDA) is functioning effectively. Therefore, the present scenario highlights that foreign equity cap can now be raised to 49 per cent.
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INDIAS FEATURES AS A HOST COUNTRY FOR FDI: FACTORS AFFECTING FDI IN INDIA: Rate of interest Speculation Profitability Costs of production Economic conditions Government policies Political factors WHAT ARE FOREIGN INVESTORS LOOKING FOR? Good projects Demand Potential Revenue Potential Stable Policy Environment / Political Commitment Optimal Risk Allocation Framework
ADVANTAGES INDIA HAS TO OFFER: Stable democratic environment over 60 years of independence Large and growing market World class scientific, technical and managerial manpower
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Cost-effective and highly skilled labour Abundance of natural resources Large English speaking population Well-established legal system with independent judiciary Developed banking system and vibrant capital market Well developed accountancy, legal, actuarial and consultancy profession
INDIA LAND OF OPPORTUNITIES:
STRONG MACRO-ECONOMIC PERFORMANCE:

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Sustained Economic growth; o 7% - Current Year o 8% - decade o Over 6% - Next 50 Years Goldman Sachs Exports growth - over 19 % in 2002-03; Non Oil imports growing at 31%-Economic vibrancy Positive balance of trade with USA and China FII Investment over US$ 5 billion so far this year Developed Banking system moving rapidly towards ICT integrated core banking/net banking Mature Capital Market NSE third largest, BSE fifth largest in terms of number of trades ECONOMIC LIBERALIZATION IN INDIA: 1. FISCAL POLICY REFORMS : a. Stable tax regime with just 3 rates for both Excise as well as Customs duties b. Full National treatment for foreign Cos. incorporated in India 2. INDUSTRIAL POLICY REFORMS : a. Capacity licensing dispense with b. Compulsory licensing only in 6 sectors: restrictions on grounds of national security, public health, public safety c. FDI policy being progressively liberalized 3. TRADE POLICY REFORMS : a. Most items on Open General License, Quantitative Restrictions lifted;
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4. MONETARY POLICY AND FINANCIAL SECTOR REFORMS : a. Interest rates brought down Bank rate/Prime lending rate lowered b. Banking Sector reforms prudential norms stiffened c. Securatization Act for better security for creditors d. Competition law enacted. Competition Commission constituted e. Independent regulators in place for Insurance sector (IRDA) and Capital Markets (SEBI) 5. EXCHANGE CONTROLS RELAXED; a. Profits and dividends can be freely repatriated.
FDI FEATURES:
OPENNESS
Largely automatic; small negative list; FDI in most sectors; uniform application of policy; ownership restriction in a few sectors; no min. cap in most sectors; freely repatriable; M&A policy considered restrictive
FDI LEGISLATION
Covered under Foreign Exchange Management Act (FEMA)
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TECHNOLOGY COLLABORATION EMPOWERED BODY
Most liberal (rated No.1 in terms of ease of licensing) Foreign Investment Promotion Board (Small set to service FIPB)
Rated as the best BPO destination. Best technology licensing regime Rated among the most favourite investment destinations. Major destination for foreign venture capital funds. Sixth most attractive investment destination. Also among the top 10 Tourist Destinations.
INSURANCE: FDI up to 26% allowed on the automatic route However, license from the Insurance Regulatory & Development Authority (IRDA) has to be obtained There is a proposal to increase this limit to 49%
INDIA - THE BACK OFFICE HUB:
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India has become the most preferred destination Outsourcing trend increasing o GE,TI, Intel, CISCO, Microsoft, Dell, Sun Micro, Oracle, LG, Ford, American Express and other financial sector companies.
Customer needs are being met o Large pool of skilled English speaking workforce skills and scalability, 24x7 support o Productivity and quality enhancement o Conducive policy environment and Government support o Highly improved telecom infrastructure o Call center career is aspirational unlike a low choice in the West
WHY DOES INDIA ATTRACT MAXIMUM FDI INFLOWS?
India is potentially active in terms of investments and provides a galore of opportunities to the foreign players into the market. Foreign companies who aspire to
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become a global player would grab the opportunities, India provides in terms of investments. The foreign companies enjoy the rights to set up branch offices, representative offices, and also carry out outsourcing activities in terms of various developmental programmes in India. All these have opened up innumerable options for the foreign investors to expand their businesses at a global level. This is clearly noticeable from below presented graph showing FDI flows in India:
BUSINESS COMPLAINTS: Excessive government interference High tariffs and excessive indirect taxes
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Differential tax rates for foreign companies Restrictions on foreign investment Substandard Infrastructure Questions about sanctionity of contract Weak enforcement of intellectual property rights
ADVANTAGES AND DISADVANTAGES OF FDI:
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This is a very subjective question. It will depend on the country that is being invested in, the industry where the investment is being made, the firm that is making the investment and amount of investment that is being made. 1. FOR HOME COUNTRY / FOREIGN INVESTORS: ADVANTAGES: The advantages of the Foreign Direct Investments are that the majority victorious domestic companies, particularly those with only one of its kind compensation, spend abroad. The second advantage to be considered to be is the direct investment that makes companies more victorious internally. Companies with Foreign investment generally tend to be most profitable as well as it is to have a more stable sales and earnings.
Jumping the tariff wall (and other non- tariff barriers) Securing access to minerals and other resources located in the host country Lower wage in host developing countries for labour. Protection of market shares in exports if MNC's competitors also have established plants in the area. DISADVANTAGES: The disadvantages of foreign direct investments are cost of travel and communications abroad. It also does not very much relate to local business tax laws, business atmosphere in particular and other government regulations. Another disadvantage could be the language and culture differences. More costly travel/communications abroad. Not having a close familiarity with local business tax laws, business scene in general, and various government regulations. The MNCs face risks such as exchange rate changes, expropriation by the government, and other actions that can be taken against them. Language and culture differences Higher wages/benefits must be paid to the personnel going abroad.
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2. FOR THE HOST COUNTRY / INDIA: ADVANTAGES: The pros of foreign direct investment are the flow of cash into the country. It will obviously stimulate economic activity in the country. Employment numbers will go up. Existing domestic producers will have to pull up their socks due to the onset of high quality competition. The international community will sit up and take notice. The Government will be taken seriously in the international summits because the number of stakeholders in the country has increased.
Increased productivity: due to technology transfer or due to improved managerial, technical skills.
Employment will increase in the host country.
Possibility of earning foreign exchange with sale/export of FDI produced goods abroad (generally, foreign investors may help introduce and integrate the economy of the host country in to the global market place). Weakening the power of domestic monopolies at home. causes a flow of money into the economy which stimulates economic activity it may give domestic producers an incentive to become more efficient the government of the country experiencing increasing levels of FDI will have a greater voice at international summits as their country will have more stakeholders in it
DISADVANTAGES: The cons of foreign direct investment are most visible in cases where the industry could have national secrets. The defense sector could be at risk if it allows FDI. Foreign policies may be enforced that do not go down well with domestic employees. Some MNCs are larger/more powerful than the countries they invest in The danger of a foreign monopoly power. Only low level skill development in the host country.
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Profits of MNCs are repatriated.
Inflation may increase slightly Domestic firms may suffer if they are relatively uncompetitive If there is a lot of FDI into one industry e.g. the automotive industry then a country can become too dependent on it and it may turn into a risk that is why countries like the Czech Republic are "seeking to attract high value-added services such as research and development (e.g.) biotechnology)" ADVANTAGES OF FDI IN INDIAN INSURANCE: Attracting foreign direct investment has become an integral part of the economic development strategies for India. FDI ensures a huge amount of domestic capital, production level, and employment opportunities in the developing countries, which is a major step towards the economic growth of the country. The incorporation of a range of well-composed and relevant policies will boost up the profit ratio from Foreign Direct Investment higher. Some of the biggest advantages of FDI enjoyed by India have been listed as under: Economic growth: This is one of the major sectors, which is enormously benefited from foreign direct investment. A remarkable inflow of FDI in various insurance companies in India has boosted the economic life of the country. More job opportunities Opening of the insurance sector to the foreign investors has led to a renaissance in the Indian economy. Job opportunities show bright signals. The people working in insurance sector in India are approximately the same as in the UK, which is 1/7th of Indian population. There is the new concept of 'bancassurance' that has paved the way for more job opportunities in the financial sector. There is a growing demand for specialists in the area of marketing, finance and human resource management apart from the demand for technical expertise from professionals in underwriting and claims management subjects.
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Inflow of foreign capital There has been a huge inflow of funds into the country with foreign capital splurging in the Indian insurance companies as startup capital. Indigenous reinsurance Even the reinsurance sector looks for magnificence with global players like Swiss and Munich Re keen on entering into insurance in India. The technology transfer Apart from the above monetary aspects there would also be revolution in the transfer of technologies and knowledge from the global participants in the fields of training, risk management, underwriting, introduction of new policies etc. With more participants in the market, there has been a healthy competition with increased advertisement expenditure for brand building. There would be scientific pricing methods. Linkages and spillover to domestic firms: Various foreign firms are now occupying a position in the Indian market through Joint Ventures and collaboration concerns. The maximum amount of the profits gained by the foreign firms through these joint ventures is spent on the Indian market.
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57
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EMERGING TRENDS IN INSURANCE DUE TO FDI (POSITIVE IMPACTS OF FDI): During the last three decades, global insurance penetration as a percentage of the gross domestic product has more than doubled from around 3.5 per cent in 1970. The insurance sector thus has grown more strongly than the overall economy. Insurance is one sector whose contribution to GDP has been quite.
Insurance is one sector whose contribution to GDP has been quite significant. Post independence, the Indian Government nationalized the private life insurance companies with a view to raise funds for the infrastructure developments, which lagged behind pathetically. The scatter of general insurance companies was brought under one umbrella - the General Insurance Company in 1972. Nationalization, however, brought with it the public sector bureaucracies, cumbersome procedures and inefficiencies but still these nationalized companies managed to have millions of policyholders, who had no other options. While the early 90s brought forth liberalization on all major economic fronts, the insurance was left untouched. But before long, the passage of IRDA bill in 1999 paved the way for the liberalization of Indian insurance sector.
Why open door policy became inevitable
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The insurance premium in India accounted for a mere 2 per cent of GDP as against the world average of 7.8% during 90s. The insurance premium as a percentage of savings in India is 5.95% as compared to 52.5% in UK. The nationalized insurance companies could barely unearth the vast potential of the Indian population since the policies lacked flexibility and the Indian life insurance products were not linked to the contemporary investment avenues. However, Claim settlement ratio of LIC stood at 95% and GIC at 74% which was much higher than the global average of 40%. THE CHALLENGES BEFORE INSURANCE INDUSTRY: But the other side of the coin, say observers, gives a low picture. Large-scale operations and bureaucracies entangled in the public sector companies were the main areas of concern of the nationalized insurers. The state owned insurance companies, experts say, have not shown much initiative to venture into the rural areas to sell crop insurance or any other personal insurance. An insurance area which requires an in-depth study, is the pension segment. Indian demand for pension products is huge, keeping in mind the lack of comprehensive social security system.
Insurance majors are yet to venture deep into the rural areas. Other areas, which require in-depth study, are the pension segment and health insurance. More liberalized actions are needed not only to drive the Indian economy towards an annual growth rate of 7% to 8% but also to sustain the growth. A faster growth would attract foreign direct investment (FDI) inflow of $10 billion every year as against the current FDI in the range of 3 billion.
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A Report on Infrastructure points out that 85% of investible funds for infrastructure have to be generated indigenously and the study revealed that India would require $100 billion over the next five years to meet its infrastructure needs. Given the saving scenario in India, there is much more growth potential and the liberalized insurance sector is likely to mobilize the long-term funds for infrastructural investments. Multinational insurers are keenly watching the transformation of Indian insurance sector, mainly because the domestic markets have become saturated for the respective insurers. International insurers capture a significant part of their business from their multinational operations only. UK' largest life and non-life insurers acquired 40% to 60% of their total premium from their multinational operations. The foreign investors are finding the Indian market more attractive because even a small share of a growing market looks lucrative. For examples, the Korean insurance market, the 30th largest market in the world premium volume in 1971 obtained the 6th position in 1996, the reason being its multinational operations.
Global investors prefer Indian insurance markets The other reason as to why the global insurers are interested in investing their funds is the nature of the operations over a wide geographical area would eliminate sudden dips in earnings due to the unexpected risk spread. A report presented by the world's second largest reinsurer Swiss Re on global insurance, reports complete saturation of international market.
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Foreign investors are finding Indian market more attractive because even a small share of a growing market looks lucrative. Private insurers have already proved their success by way of performance Os during last financial year by way of more than 70% growth in the premium income.
GLOBAL INSURANCE COMPANIES OPT FOR INDIAN BPOs: The Associated Chambers of Commerce and Industry of India had recently conducted a research on the BPO activities in India and reported 15% annual growth for indigenous BPO demand. The report also revealed that the BPO industry is growing at an astounding rate of 70% per annum with employment opportunities to over 100,000 people. By 2009, the BPO is estimated to employ one million people with a revenue flow of $17 billion. INSURANCE SECTOR FLOWS IT BPOs FOR CLIENT SERVICING: The Insurance sector thus is in the process of outsourcing business opportunities. Insurance sector find more potential for outsourcing business operations owing to the nature of voluminous transactions like claims processing, loan processing and customer servicing. Insurance companies with large volumes and repetitive transactions around the world are working towards lowering the cost and upgrading the service quality to their customers and business partners. INSURANCE BPOS AND INDIA: Working towards an effective cost control management, the insurance companies are on the lookout for outsourcing the service agencies for the purpose. All the related activities such as new business prospects, policy administration, claims management and customer service are carried out by the BPOs. The insurance sector is no exception to BPOs.
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Norwich Union, the UK insurance company already has BPOs set up in New Delhi and Bangalore or processing general insurance claims. Aviva operates in India with 1200 employees. The time difference between Greenwich and India provides scope for the India operations to work round the clock, 365 days. Aviva has 350 centers for servicing the British customers. 2000 employees are engaged in back office functions and for T handling British insurance claims. CHANGING PATTERNS OF INSURANCE AND TECHNOLOGY: The insurance industry has assimilated a number of changes since the last few years. All these changes were the result of certain clearly noticeable external influences. For one, the changing socio-economic and political scenario formed the perfect setting for these developments to take shape. The worldwide trend towards convergence, consolidation and globalization had its impact on the insurance industry as well. Fast changing technology, new and widening patterns of distribution and the changing profile of the customer were powerful drivers of change. The growing trend towards deregulation in many Asian countries further increased the pace of change.
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Investors worldwide are keeping their fingers crossed as they make strategies, hoping the Government will announce increase in FDIs (26% to 49%) in Indian Insurance companies. LOOKING BEYOND CONVERGENCE AND GLOBALIZATION: All this time the insurers strongly believed that size matters as it was perceived as the key to market domination and lower costs. It was soon clear that in the globalised environment to industrial group will have the kind of capital required for global domination and no single group can emerge a winner of all business sectors. BRAND BUILDING BY INSURERS: In a marked departure from the past financial services, organizations are now focusing on brand building. This is on account of the realization that we now live in a lifestyle society in which the brand image is as important as the product. Global insurance majors like Allianz, AXA and ING have already done much in this direction and are building awareness about their brands. It is now a major challenge for the domestic brands, who have to build a global brand before the global majors take over. SHAREHOLDER VALUE: In the past, insurers were giving more importance to maintenance of their solvency margin rather than making profits. American and European insurers now find its approach difficult, when they have to compete for capital with companies engaged in other industries. So the emphasis is shifting now to shareholder value and return through better capital management. Insurance companies like Swiss Re and Chubb have proved highly successful in increasing shareholder value. FURTHER SCENARIO: Global players with strong brands in the insurance industry today set up their back office operation in low cost countries, manage capital on a global basis, make use of their special skills worldwide and use their superior managerial ability to secure
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leadership positions in the industry. Such companies find opportunities for growth in Asian countries like India where they may soon have to compete with global Asian majors in the industry. In this fast developing scenario it will not be enough if the companies have futuristic strategies. Implementation of the strategies, effectively adapting them to ongoing changes can spell success.
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GOVT. PROPOSAL TO LIFT FDI CAP TO 49% IN INDIAN INSURANCE:
The Indian government has proposed to increase FDI in the insurance sector to 49%. Currently, only up to 26% FDI is allowed in the Indian insurance sector under the automatic route subject to obtaining a license from Insurance Regulatory Development Authority (IRDA). According to Booming Insurance Market in India (2008-2011), a recent report from RNCOS, the Indian insurance market, particularly life insurance sector, will get a strong boost from the proposed FDI hike. Increasing limit to 49% is expected to raise the FDI in life insurance sector by around 2.5 times from the present level of approx Rs 2,500 Crore. The senior insurance industry analyst at RNCOS opined, The proposed increase in FDI will attract more foreign inflow into the Indian economy and strengthen the countrys insurance industry. This increase (in FDI) will bring more capital and help the sector in maintaining the growth momentum. The insurance sector has been in strong need of the capital investment, in fact, the requirement has increased dramatically due to recent losses on unit-linked products with weak stock market. Also, being a capital intensive sector, the insurance sector requires huge investments over a prolonged period of time, and therefore, there is constant need for capital infusion that can be met through FDI. Increasing FDI limit will also encourage the insurance sector to come up with more innovative distribution channels, enrich the current product portfolio, upgrade technology, and bring best global practices into the country. Beside this, raising FDI cap would also help insurers to expand their coverage to rural and micro-insurance segments as penetration in rural and remote areas require additional capital infusion. (NOTE: RNCOS, incorporated in the year 2002, is an industry research firm. It has a team of industry experts who analyze data collected from credible sources. They provide industry insights and analysis that helps corporations to take timely and accurate business decision in today's globally competitive environment.)
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IMPACT OF FDI AND LIBERALISATION ON T H E I N S U R A N C E S E C T O R (NEGATIVE IMPACTS OF FDI) (AS SUBMITTED BY THE LEFT PARTIES TO THE UPA) The Finance Minister, while presenting the first Budget of the UPA government, has proposed to raise the FDI cap in three sectors . Three sectors of the economy fully meet this description. They are insurance, telecommunications and civil aviation . The specific proposal for the insurance sector is to raise the FDI cap from 26 to 49 percent. The argument about this move is unjustifiable on several grounds. PRIVATE PLAYERS, FOREIGN EQUITY AND PROFITABILITY: The Union Government 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. Following the opening up of the insurance sector, 12 private sector companies have entered the life insurance business. Apart from the HDFC, which has foreign equity of 18.6%, all the other private companies have foreign equity of 26 per cent. In general insurance 8 private companies have entered, 6 of which have foreign equity of 26 per cent. Among the private players in general insurance, Reliance and Cholamandalam does not have any foreign equity. The following table gives an aggregate picture of the current scenario of the insurance sector in India.
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Accord ing to the Annual Report of the IRDA, 9 out of the 12 private companies in life insurance suffered losses in 2006-07. The aggregate loss of the private life insurers amounted to Rs. 38633 lakhs in contrast to the Rs.9620 crores surplus (after tax) earned by the LIC. In general insurance, 4 out of the 8 private insurers suffered losses in 2006-07, with the Reliance, a company with no foreign equity, emerging as the most profitable player. In fact the 6 private players with foreign equity made an aggregate loss of Rs. 294 lakhs. On the other hand the public sector insurers in general insurance made aggregate after tax profits of Rs. 62570 lakhs. Not only are the public sector insurance companies more profitable than the private ones, the private insurer which is most profitable (Reliance) is one which has no foreign equity. If profitability is taken to be an important indicator of efficiency, it is clear that the case for further hike in the FDI cap in the insurance sector cannot be made on efficiency grounds. QUESTIONABLE REPUTATION OF THE FOREIGN PARTNERS: The record of some of the foreign companies who have started operating in India is being questioned abroad. A recent article published in The Economist (May 4, 2006) on AIGs Accounting Lessons (AIG is Tatas partner in India) came with the screaming headline which said it all: The worlds largest insurance company shows how to polish profits statement.
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The Prudential Financial Services (ICICIs partner in India) is facing an enquiry by the securities and insurance regulators in the U.S. based upon allegations of having falsified documents and forged signatures and asking their clients to sign blank forms (New York Times, May 31, 2006 and Wall Street Journal, May 31, 2006). This follows a payment of $2.6 billion made by Prudential to settle a class-action lawsuit attacking abusive life insurance sales practices in 1997 and a $ 65 million dollar fine from state insurance regulators in 1996. It is evident that the questionable activities of these insurance companies are not prevented by state imposed penalties and litigations. The financial health of many of the foreign insurance companies operating in India is also a cause of serious concern. The Economist (April 1, 2006) reports the sorry plight of Standard Life of UK (HDFCs partner in India), which is unable to remain afloat without the possibility of raising money in debt or equity markets. Royal Sun Alliance also shut down their profitable businesses in 2002. According to the Mercer Oliver Wyman Report the German, Swiss, French and British insurers suffer from severe capital inadequacy, which is a result of undertaking risky investments in equity and debt instruments in the past. Several issues of Sigma, a reputed Swiss journal on insurance, have reported that the U.S. and Europe based insurance companies are faced with gloomy growth prospects in the advanced country markets, with several companies experiencing negative growth in the recent past. Moreover, tighter capital adequacy norms and other regulations that are currently being imposed in the advanced countries are forcing these insurance companies to seek less regulated markets in developing countries to undertake their high-risk ventures. Raising the FDI cap in India at this juncture would expose our financial markets to the dubious and speculative activities of the foreign insurance companies at a time when the virtues of regulating such activities are being rediscovered in the advanced countries. COMPETITION IN THE INSURANCE SECTOR: Even after the liberalisation of the insurance sector, the public sector insurance companies have continued to dominate the insurance market, enjoying over 90 per cent of the market share. In fact, the LIC, which is the only
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public sector life insurer, enjoys over 98 per cent of the market share in Life insurance. Market Share of Life and Non life Insurance sectors (as % of total premium underwritten by insurers) Insurance Sector 2005-06 2006-07
Life Insurance
Private Sector Public sector
0.54 99.46 3.68 96.32
1.99 98.01 8.64 91.36
General Insurance
Private Sector Public sector
Source: IRDA Annual Report 2007 - 08 Given the huge market share enjoyed by the public sector companies, the argument, which is often made by advocates of greater liberalisation, that the entry of private players would bring down the cost of insurance due to enhanced competition, does not seem to be convincing. The price making capacity of the market leaders in the public sector is likely to remain intact for the time being. The foreign insurance companies do have the reputation of charging less premium compared to the risks involved and promising abnormally high returns, in order to grab greater market share. Such competition, however, although capable of bringing down the cost of insurance for a while, has often led to gigantic frauds and bankruptcies. Moreover, as is the case in other markets, the initial flurry of entries into the Indian insurance market would invariably be followed by a phase of mergers and acquisitions that would lead to cartelization, precluding the possibility of competition driving down the costs in the medium run. In the long run, other forms of non-price competition like aggressive advertisement wars are likely to lead to increasing costs, eventually harming the interests of the consumers. These phenomena in the insurance market have been observed in several advanced countries. If the public sector companies start imitating the strategies of the foreign insurance
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companies in order to defend their market shares, it would be at the cost of undermining their important social objectives, which they have been fulfilling so impeccably till date. IMPLICATIONS FOR RESOURCE MOBILISATION: A major role played by the insurance sector is to mobilize national savings and channelise them into investments in different sectors of the economy. However, no significant change seems to have occurred as far as mobilizing savings by the insurance sector is concerned, following the liberalisation of the insurance sector in 1999. Data from the RBI show that the trend of the savings in life insurance by the households to GDP ratio, while showing a clear upward trend through the 1990s signifying increasing business for the insurance sector, does not show any structural break after 1999 (since liberalization) (see chart below). It can be inferred therefore that the foreign capital which flowed in after the opening up of the insurance sector has not been accompanied by any technological innovation in the insurance business, which would have created greater dynamism in savings mobilization.
95
96
97
98
99
2000
01
02
03
Years
Source: Handbook of Statistics, Reserve Bank of India

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Far from expanding the market for the insurance sector, the business activities of the private companies are limited in urban areas, where a fairly good market network of the public sector insurance companies already exists. The glaring evidence for this is the composition of agents operating in the insurance sector. According to the IRDA Annual Report the number of insurance agents in urban and rural India was in 100:76 ratio in the public sector companies, in 2006-07. For the private insurance companies this ratio was 100:1.4. Due to their urban-biased operational activity, the private insurance companies can neither increase the insurance base of the economy significantly, nor lead to substantial employment generation. Given this scenario, further increase in foreign participation is only going to lead to intensified competition for the urban insurance markets, rather than leading to a growth in overall savings. While the proposals for hike in FDI were placed, the arguments advanced were that FDI will continue to be encouraged and actively sought, particularly in areas of infrastructure, high technology and exports. ARE THESE ARGUMENTS TENABLE? No new technology or product is brought into the country: The issue of foreign equity is often linked with induction of new technology and products. The private insurance companies have nothing to offer in this respect. In the insurance sector, there is no technology needed to be brought in from other countries, leave alone high technology. The mortality rates and other principles of insurance are based on the Indian conditions, because the policyholders are from this country. The products of LIC are being renamed by the private insurance companies and are sold as their own products. Hence, foreign expertise is also not involved in this sector. So there is no justification even on this count. It was also argued that competition will expand market and the foreign insurers will bring better products. This has simply not happened. The size of the market has remained by and large the same and from this market the private companies are picking up the creamy sections in the metros seriously eroding the ability of public sector to cross subsidizes its products in the rural areas.
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FLOW OF FUNDS FOR INFRASTRUCTURE A MYTH: Life insurance is all about mobilising the savings for long term investment in social and infrastructure sectors. It was also argued that opening up of insurance market would enable huge flow of funds into infrastructure. The record of private companies on this is dismal. More than fifty percent of the policies they sell are unit-linked insurance where the decision on investment of savings element in insurance is taken by the policyholders. In fact as per a press report, ninety five percent of policies sold by Birla Sun Life and over 80 percent of policies sold by ICICI Prudential were unit-linked policies during 2006-07. Under these schemes, nearly 50 percent of the funds are invested in equities thus limiting the fund availability for infrastructural investments. As against this, the LIC has invested Rs.40, 000 crores as at 31.3.2007 in power generation, road transport, water supply, housing and other social sector activities. The Law Commission of India released a consultation paper on 16th June 2003 on the revision of the Insurance Act, 1938. The consultation paper proposes a suitable amendment to Section of 27C of Insurance Act allowing insurers especially carrying on general insurance business to invest funds outside India. So, once the law is amended to allow insurers to invest funds abroad, the exports that these private companies would generate, would be the export of savings of the people. Raising the FDI cap also does not seem justifiable as far as channelizing savings into investments are concerned. The life insurance sector invested a total of Rs. 31335.89 crores in the infrastructure sector in 2006-07. Out of this the contribution of the LIC was Rs. 30998.16 crores, which was 98.92 per cent of the total investment in infrastructure by the entire life insurance sector. The figures provided by the IRDA Reports further suggest that the share of the public sector life and non-life insurance companies in investment in infrastructure is greater than their market share. Despite the FDI cap being set at 26%, the investment from the insurance sector to the infrastructure sector was predominantly from the public sector companies. Therefore, the argument that raising the FDI cap in the insurance sector would help in mobilizing resources for infrastructure does not hold.
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It is also worth mentioning that the only insurance company involved in insuring Indian exports is the Export Credit Guarantee Corporation of India, which provides insurance cover to export credit. The ECGC has been in existence since 1957. It is functioning under the United India Insurance Co. No private player with foreign partnership has ventured into this area. Moreover, the LIC and other public sector units are the only ones to undertake overseas operations, as reported by the Annual Reports of the IRDA. Foreign participation has also not helped in marketing Indian insurance products abroad. CONCLUSION: Governments of the advanced countries like the U.S. continue to apply pressure on developing countries to open up their insurance sectors. China, for instance was pressurized to open up its insurance sector, in return of its entry into the WTO. However, the unilateral move to further liberalize the insurance sector in India is unjustifiable. Events over the decade of the 1990s have borne out the fact that financial liberalisation does not contribute positively to investment and economic growth. Countries which enthusiastically opened up their financial sectors in order to attract capital inflows often experienced enhanced volatility in their financial markets and speculative attacks on their currency. Further opening up of the insurance sector to foreign capital, which serves as a vital financial intermediary of the national economy, is therefore not warranted.
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CONCLUSION: As evidenced by analysis and data the concept and material significance of FDI has evolved from the shadows of shallow understanding to a proud show of force. The government while serious in its efforts to induce growth in the economy and country started with foreign investment in a haphazard manner. While it is accepted that the government was under compulsion to liberalize cautiously, the understanding of foreign investment was lacking. A sectoral analysis reveals that while FDI shows a gradual increase and has become a staple for success for India, the progress is hollow. FDI has become a game of numbers where the justification for growth and progress is the money that flows in and not the specific problems plaguing the sectors like insurance. On present projections, FDI flows are likely to remain only a small fraction of gross capital formation in the Indian Insurance sector (only 26% FDI is allowed). Hence, their potential contribution is not likely to be quantitative but qualitative. Foreign investment is likely to be not an engine of growth but a catalyst for growth. If so, the quality of foreign investments than quantity that enters the country matters. Some insurance companies invest in India to benefit from better availability of human resources, including the growing practices of outsourcing and off-shoring. Others are attracted by the large market and the potential profits in that. Ideally, India would like to attract efficiency-seeking FDI and exclude profit-seeking FDI, though from practical or regulatory points of view, it is not easy to distinguish between the two types of FDI.
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FDI is a major source of technology transfer in a developing country like India. Besides this, it has given boost to various developments in insurance sector. It has created employment and increases competition in market. It has helped country grow potentially and at a faster pace. India Insurance has observed the positive effects of FDIs in the recent times. Major concerns are the policies which will help in attracting more penetration in rural markets. Hence India should keep in mind all the pros and cons of FDIs while deciding the policies, which will end up in countrys future growth. It is hard to deny that Indian industry needs fresh investment but the hope that openness to FDI alone can achieve this is misplaced. With FDI accounting for only a small fraction of gross capital formation in Indian Insurance, its direct contribution to the growth rate be marginal in the near future. In the Indian context, growth-led FDI is more likely than FDI-led growth. To that extent, foreign capital is neither necessary nor sufficient for growth in India. Greater openness to foreign capital (there is a proposal to raise FDI cap from 26 to 49%) may be desirable but it does not guarantee penetration into unexplored areas left by public insurers. Thus the impact of liberalization and Foreign Direct Investment on the Indian insurance sector and general economy presents a mixed picture. All of the key players in insurance have tremendous responsibility to balance the varying priorities, to enable a sustainable future. Foreign insurers should grasp this opportunity to achieve best practices as a win-win situation for all concerned.
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Foreign Direct Investment in Insurance Sector

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FOREIGN DIRECT INVESTMENT IN INDIAN INSURANCE

FOREIGN DIRECT INVESTMENT IN INDIAN INSURANCE

TYPES OF FOREIGN INVESTMENT: Capital flows come in three primary forms: