FOREIGN DIRECT INVESTMENT IN INSURANCE SECTOR IN INDIA
VINAY V. MISHRA AND HARSHITA BHATNAGAR
There is hardly a facet of the Indian psyche that the concept of ‘foreign’ has not permeated. This term, connoting modernization, international brands and acquisitions by MNCs in popular imagination, has acquired renewed significance after the reforms initiated by the Indian Government in 1991. Generally speaking FDI refers to capital inflows from abroad that invest in the production capacity of the economy and are “usually preferred over other forms of external finance because they are non-debt creating, non-volatile and their returns depend on the performance of the projects financed by the investors. FDI also facilitates international trade and transfer of knowledge, skills and technology.”1 India's foreign investment policy is fairly liberal, allowing up to 100% foreign investment in most sectors. However, some sectors have caps on FDI. The government also imposes caps on portfolio investments, within the FDI caps or separately, to cap total foreign equity in certain sectors. These caps apply mainly in areas considered strategic or sensitive, as well as to any investments considered to have national-security implications. In most sectors, investment up to the caps is permitted on the "automatic route", meaning that companies need only file papers with the central bank after investing. In areas that the government wants to monitor more closely, prior approval is necessary from the Foreign Investment Promotion Board.2
* Gujarat National Law University, Gandhinagar, India.
1 Planning Commission of India.2002. Report of the Steering Group on Foreign Direct Investment: Foreign Investment India.[Government Report]. p 11. New Delhi: Planning Commission, Government of India. Accessed from
http://planningcommission.nic.in.aboutus/committee/strgrp/stgp_fdi.pdf. on 5th September, 2008 at 10:34 pm.
2 Foreign Investment Promotion Board (FIPB) has been set up by the government of India in order to increase the flow of foreign direct investments into the country. FIPB is the only agency in the country that deals with foreign direct investments and investments into India. The main objective of Foreign Investment Promotion Board (FIPB) is to encourage foreign 204 MqJBL (2009) Vol 6
Foreign Direct Investment in India is allowed through four basic routes namely, financial collaborations, technical collaborations and joint ventures, capital markets via Euro issues, and private placements or preferential allotments. FDI inflow helps the developing countries to develop a transparent, broad, and effective policy environment for investment issues as well as, builds human and institutional capacities to execute the same. 3
The insurance sector is of considerable importance to every developing economy; it inculcates the savings habit, which in turn generates long-term investible funds for infrastructure building. The nature of insurance business ensures constant inflow of funds - the payout is staggered and contingency related - thereby making it readily available for investment on infrastructure building. Its contribution to GDP is quite significant.
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, many private sector companies have entered the insurance business.
II HISTORY OF INSURANCE
A contract of insurance may be defined as a contract whereby, one person, called the ‘insurer’, undertakes, in return for the agreed consideration, called the ‘premium’ to pay to another person, called ‘assured’, a sum of money or its equivalent on the happening of a specified event.4
The aim of all insurance is to make provisions against dangers which beset human life and dealings. Those who seek it endeavor to avert disasters from themselves by...