Oct. 31 (Bloomberg) -- India's cabinet approved legislation that will allow companies such as American International Group Inc. and New York Life Insurance Co. to own as much as 49 percent in local insurers, up from the current 26 percent.

The government plans to introduce the bill in parliament to raise the overseas investment cap in private insurers, Finance Minister Palaniappan Chidambaram said in New Delhi today.

Asia's third-largest economy wants to ease some overseas ownership limits to attract investments as the global financial turmoil erodes confidence. Overseas investors have sold as much as $12.7 of Indian equities this year, having bought a record $17.2 billion last year.

Raising the limit may increase investment in India's life insurance industry almost 2.5 times from 25 billion rupees ($506 million) now, said T.R. Ramachandran, chief executive officer and managing director of the Indian unit of Aviva Plc, the U.K.'s biggest insurer by premiums.

``This proposed increase in foreign direct investment will add to the foreign inflow into the Indian economy, giving it a boost and will enable the insurance industry to grow and reach out to the length and breadth of the country,'' Ramachandran said in an e-mailed release.

India's foreign-exchange reserves have dwindled by more than $42 billion to $273.9 billion as of Oct. 17, from a record $316.2 billion reached in May, central bank data show.

Funding Needed

Any increase in holdings may boost sentiment and help generate funds that can be used for building infrastructure such as roads, utilities and water supply networks. Prime Minister Manmohan Singh has said that the country may need to consider alternative funding avenues for the $500 billion being sought for improving infrastructure.

The legislation is, however, unlikely to be approved by the current parliament because of the lack of time, Chidambaram said. India has to hold elections for a new government and parliament by May.

Eighty percent of the country's 1.1 billion people have no insurance cover and 88 percent of the workforce doesn't contribute to pension schemes, according to Lehman Brothers Holdings Inc.

New York-based AIG, the world's largest insurer by assets, New York Life Insurance Co. and Prudential Plc, based in London, are among insurers that are restricted to 26 percent stakes in their ventures in India.

India in 2000 opened up its insurance industry to overseas investment by dismantling the 44-year monopoly of state-owned Life Insurance Corp. of India and its non-life counterparts.

`Comprehensive Amendments'

``These are comprehensive amendments,'' Chidambaram said today. The amendments will remove archaic and redundant provisions in the legislations, he said.

The government also plans to introduce a bill in parliament to increase the paid-up capital of Life Insurance Corp. to 1 billion rupees ($20 million) from the current 50 million rupees, Chidambaram said.

The government's plans to give overseas companies a greater role in India's financial industry were blocked by Prime Minister Singh's erstwhile communist partners, who in July withdrew support over the nuclear accord with the U.S.

To contact the reporter on this story: Bibhudatta Pradhan in New Delhi at bpradhan@bloomberg.net.

Last Updated: October 31, 2008 04:05 EDT