"In the long run it is a positive move as it would discourage policy surrenders. In the short run, life insurers have to face some problems, HDFC Standard Life's Padalkar said."
By Venkatachary Jagannathan

Chennai, July 16 - Indian insurance officials hope the insurance bill will have a smooth passage in parliament like the TRAI bill and provide clarity to the 2014-15 budget proposals, say industry officials.

The passage of the TRAI bill gives us the hope that the insurance bill (Insurance Laws (Amendment) Bill) will also be passed. But the finance minister's budget speech and some of the proposals are confusing and need better clarity, Vibha Padalkar, executive director and chief financial officer at HDFC Standard Life Insurance Company, told IANS.

The private insurance industry -- life and non-life -- is looking forward to the passage of the insurance bill so that the foreign direct investment (FDI) goes up from the current 26 percent to 49 percent.

However, what is confusing the officials is the Finance Minister Arun Jaitley's budget speech and other proposals like the two percent withholding tax on payments made to policy holders.

The composite cap in the Insurance sector is proposed to be increased up to 49 percent from the current level of 26 percent, with full Indian management and control, through the FIPB route, Jaitley said, presenting his maiden budget.

What does the composite cap, full Indian management and control mean is not clear, Padalkar said.

Echoing her, several industry officials wondered whether full Indian management and control would be achieved through differential voting rights, or through compelling the insurers to have their board majorly with Indians and the company to be headed only by an Indian.

It is not clear whether the voting rights would be capped at 26 percent for foreign partner or they would have normal rights upto 26 percent and the remaining 23 percent would be subjected to differential voting rights, they said.

The finance minister's rider that Indian promoters will have full management control is discriminatory. It is best to leave the selection of the CEO-Indian or foreigner- to the promoters. The government should not decide on that, a senior official of a private life insurer told IANS preferring anonymity.

According to him, it would be better to say board representation to the promoters would be in their shareholding ratio. With foreign equity capped at 49 percent the majority of the board positions will be for Indians.

As per the Insurance Act voting right of every shareholder of an insurance company should be proportionate to the paid-up capital held by him, he added.

The industry officials are also apprehensive about routing the FDI proposals through Foreign Investment Promotion Board (FIPB) instead of the current automatic route.

In the banking sector FDI up to 49 percent is under automatic route. There are lots of checks and balances in the insurance sector. With stiff solvency norms policy holders will not lose their monies. There need not be any differential treatment between these two sectors, another senior industry official told IANS.

However former member of Insurance Regulatory and Development Authority (IRDA) K.K.Srinivasan has a different take on the issue.

Being a multifaceted body, FIPB can perhaps look at FDI proposals in greater depth, than, say, the finance department of IRDA. Also it gives an opportunity to rectify short comings, if any, in the earlier 26 percent FDI cases already cleared. But the flip side is that it is reintroduction of some kind of license-permit raj considering the fact that FIPB is largely populated by civil servants, Srinivasan told IANS.

The other issue that bothers the life insurers is the budget proposal of two percent withholding tax.

As per the proposal, life insurers have to deduct the tax on all payments to policy holders exceeding Rs.100,000 in a fiscal, except death claims, on policies where the premium payable on any year exceeds 10 percent of the sum insured.

In the long run it is a positive move as it would discourage policy surrenders. In the short run, life insurers have to face some problems, HDFC Standard Life's Padalkar said.

According to an industry official, those who had largely sold single premium life policies, pension policies would be impacted by the withholding tax proposal.


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