The Reserve Bank of India has proposed changes in the provisions relating to private banks that will make it difficult for them to attract foreign investment if they have insurance ventures. Also, private banks that are having substantial foreign investment will find it difficult to float insurance ventures with foreign partners. The RBI has suggested these changes to ensure that 26 per cent foreign investment limit in insurance sector is not breached even indirectly.

The RBI proposals mean that private sector banks that have substantial foreign investment will need permission from both RBI and IRDA for new insurance ventures. As per the existing FDI guidelines, all downstream investments by a majority Indian owned and/or controlled by Indian company are considered as Indian investment. In the case of banks, the policy allows 49 per cent FDI through automatic route and a further 25 per cent through approval of the FIPB taking the total to 74 per cent.

Now the guideline is that a majority Indian owned and controlled bank can set up an insurance venture with 26 per cent foreign stake. But it would be violating the sectoral limit as its foreign investors will also have a proportionate stake in the downstream insurance venture. The RBI is keen to preclude such investment beyond the sectoral limit

This approach of RBI seems a bit conservative when seen in the context of the Finance Ministry's move to push the Insurance Laws Amendment Bill stipulating hiking of foreign equity in new insurance joint ventures to 49 per cent from the existing 26 per cent. RBI has suggested lowering the foreign investment limit in the new private sector banks to below 50 per cent, In its discussion paper, RBI mentions that since the objective is to create strong domestic banking entities and a diversified banking sector, the aggregate non resident investment including FDI, NRI and FII could be capped at a suitable level below 50 per cent and locked at that level for the initial ten years.

Observers here mention that the RBI proposal seems to be at variance to the mood in the finance ministry to give a new boost to the financial sector reforms. The finance ministry wants to push the Insurance Laws Amendment Bill in cooperation with the BJP and this Bill certainly will give a boost to the much needed reforms in the insurance sector including wider participation by the foreign companies. Indian Government has given some indication to the Obama administration that India will be taking some action on the Insurance Laws Amendment Bill on the lines of the Nuclear Liability Bill so that the commitments to the US side are kept.

On the Nuclear Liability Bill, there has been an understanding between the Congress and the BJP and this sort of understanding can facilitate the passage of the Insurance Laws Bill also in Parliament before the US President arrives in India on his first official visit in early November. Right now, the Insurance Laws Bill is before the Standing Committee on Finance of Parliament and it is still to be cleared as there are differences on the provisions of the Bill between the Congress and the opposition members, especially the BJP and the Left.

In the present climate of bonhomie between Congress and BJP on the Nuclear Liability Bill, it is quite likely that the Finance Minister Mr. Pranab Mukherjee who is coordinating with the core group of BJP comprising Sushma Swaraj, Arun Jaitley and Yashwant Sinha, will make special efforts to get BJP's nod to the Bill at the meeting of the SCF presently headed by Mr. Yashwant Sinha. If the two parties can arrive at an understanding like they did on Nuclear Liability Bill, the controversial Insurance Laws Bill will have no problem in getting safe passage in Parliament. BJP really holds the key to the future of the insurance sector reforms in the country. (IPA Service)