Insurers need not worry, legal experts say

NEW DELHI: Insurers who are worried about policy uncertainty following an ordinance, which allowed an increase in foreign direct investment (FDI) limit from 26% to 49% in the sector, can draw comfort as legal experts said investments made on the basis of the ordinance will remain valid even if it lapses as a result of not being replaced by an act within a specified time period.
Shardul Shroff, managing partner of law firm Amarchand Mangaldas, told TOI that the ordinance had broken the legislative impasse in the insurance sector. “The promulgation of the ordinance accelerates the reforms process as it is a valid mode of making law when Parliament is not in session,” Shroff said.
Dismissing fears of the ordinance being an uncertain option, Shroff said: “Action taken under the ordinance would be valid and sustainable and the foreign insurance companies will undoubtedly take this opportunity to enhance their shareholding and we expect applications will be made to FIPB for approval of enhanced shareholding.” He added that even IRDA could “consider such proposals during the term of the ordinance”.
Another law firm chief, Rohit Kochhar, is however “cautiously optimistic” about prospects of foreign players investing in this “capital intensive industry” merely on the strength of an ordinance. “In theory, the investors have nothing to worry about the ordinance route. But in practice, given the problems already faced in the telecom and coal sectors, the investors will look for the stability of a law duly passed by Parliament,” Kochhar said.
Unless both Houses pass the pending bill, the ordinance will cease to operate on the expiry of six weeks from the reassembly of Parliament for the Budget session. This means that the government effectively has about three months to get the insurance legislation passed.

The nervousness can be gauged from the unwillingness of CEOs to comment on record.
Though the government expects an inflow of $6-7 billion, insurance companies show few signs of rushing in with investments once the ordinance is promulgated. “What happens if certain terms are changed or the bill lapses for some reason? We have asked our lawyers to examine these issues,” said the head of an insurance firm where a foreign investor holds a 26% stake.
The nervousness can be gauged from the unwillingness of CEOs to comment on record. “It will boost industry sentiment and confidence. Expected outcomes such as entry of new players or capital infusion may not play out immediately as players might prefer to see the bill in the avatar of the law as ordinance is perceived to be tentative,” said Anuraag Sunder, managing consultant at PricewaterhouseCoopers India.