India Clears FDI in Insurance, Pensions in Economy Reboot

Indian Prime Minister Manmohan Singh’s cabinet unveiled a second wave of policy changes intended to bolster a slumping economy as he seeks to restore faith in his leadership and establish a platform for his party less than two years before the next general election.

In a move that signaled the Congress party-led government’s intent to push ahead with the biggest opening of the economy to global investors since 2004, ministers approved proposals allowing overseas companies to hold as much as 49 percent in insurance firms, and for the first time permit foreign investment in pension funds. The bills will need the consent of lawmakers in Parliament.

“We have gone from a situation where we had lost faith in the government to suddenly where it is doing all the right things,” said Pauli Laursen, an Aabenraa, Denmark-based fund manager at SydInvest Asset Management, who manages about $700 million in shares of BRIC companies, including Indian power producer NTPC Ltd. (NTPC) “But for money to keep going to India, we need to have a continuous strong news flow of good decisions.”

Spurred to take action by an economy growing close to its slowest pace in three years and warnings that India’s credit rating faced being downgraded to junk status amid stalled policy making, Singh’s widening embrace of foreign investment risks further protests in the streets and in Parliament. His biggest ally quit the ruling coalition last month over the Sept. 14 proposals to allow foreign supermarket chains to open stores, while opposition parties called a daylong strike.

Aviva, ING

Aviva Plc (AV/), Allianz SE (ALV) and ING Groep NV (INGA) are among global insurers that will be able to further invest in their Indian ventures if lawmakers approve the proposals when Parliament resumes next month. The votes may provide the first test of Singh’s ability to drum up the support among regional powerbrokers and opposition groups that his minority administration will need to pass legislation.

Indian stocks have rallied since speculation mounted Sept. 14 the government would open the economy to more foreign investment. The rupee is headed for its best week since June.

Rejecting a parliamentary panel, which in December said a further increase may not be in the interest of the country’s insurance industry, the government will present a bill proposing to lift the cap on foreign investment in insurance to 49 percent from 26 percent currently. The limit on overseas investment in the pension sector will be aligned with that for insurance, Finance Minister Palaniappan Chidambaram said.

Banerjee Exit

Last month, Singh’s cabinet allowed overseas retailers such as Wal-Mart Stores Inc. (WMT) and Carrefour SA (CA) to own as much as 51 percent in supermarket ventures. The government also said foreign airlines can own as much as 49 percent in local carriers, and permitted overseas investment of up to 49 percent in power exchanges.

The second round of big-ticket policy changes announced yesterday may be harder to enforce because unlike foreign investment in retail and aviation, which are enacted by a cabinet decision, opening insurance and pensions requires parliamentary approval. Since the exit of Mamata Banerjee’s Trinamool Congress from the ruling coalition two weeks ago, the government has been reduced to a minority in both chambers of parliament.

“So far they have decided to take the low-hanging fruit,” Laursen said in a phone interview before yesterday’s cabinet meeting. “It is going to be much harder for them to pass the pensions and insurance bills because they don’t have the allies in Parliament.”

Buffett Venture

Singh’s government has in the past been rebuffed in its efforts to lift the caps on insurance and pensions by rival political parties. Both bills have been introduced in Parliament before, with the government unable to win the support of groups ideologically opposed to private companies investing in pension or insurance funds, many of them state run.

Chidambaram said the government will reach out to political parties, especially the main opposition Bharatiya Janata Party, to seek their support. “Legislation making in a Parliament where government does not have majority is a process of discussion and negotiations,” he said.

Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc. (BRK/A), said last year during a visit to India that the prior limit on overseas ownership of local insurers made investments in the country less attractive. Berkshire began selling auto coverage in the country last year after forging an agreement with Bajaj Allianz General Insurance.

“India would be more attractive if we could buy more than 26 percent,” Buffett said at a media conference in Bangalore in March 2011. “That is a factor in the decision of not investing.”

U.S. Interest

U.S. insurers have been seeking to add sales in India as they look to emerging nations for expansion. New York-based MetLife Inc. (MET), the largest U.S. life insurer, announced a deal last year for Punjab National Bank (PNB) to distribute its products.

“MetLife has long spoken out in support of the expansion of foreign direct investment opportunities in India,” Peter Stack, a company spokesman, wrote in an e-mail. “We are encouraged by these developments and will continue to watch the bill’s progress through Parliament closely.”

In May, Michel Khalaf, MetLife’s president of Europe, the Middle East and Africa, contrasted the limits in India with opportunities in Brazil, South America’s largest economy.

In India, “there are restrictions in terms of foreign ownership, a challenging regulatory environment,” Khalaf said. “Brazil is a different case in the sense that Brazil is an attractive market.”

Liberty Mutual Holding Co. struck a deal with Videocon Industries Ltd. (VCLF) in 2010 to form a company that would sell both personal and commercial insurance. The Boston-based insurer said in July that it received approval to begin writing coverage in the country.

To contact the reporters on this story: Andrew MacAskill in New Delhi at amacaskill@bloomberg.net; Bibhudatta Pradhan in New Delhi at bpradhan@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

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