Foreign Direct Investment (FDI) and Initial Public Offering (IPO) are two crucial factors in the global economy. Recent changes in FDI policy by the Union Cabinet have caught attention particularly in relation to the Life Insurance Corporation (LIC). These amendments are expected to provide a significant boost to the corporation and the country’s economy.
FDI Policy Amendment: An Overview
The Union Cabinet has approved an amendment to the FDI Policy, allowing Foreign Direct Investment up to 20% under the “automatic route” in LIC. This comes ahead of LIC’s proposed Initial Public Offering (IPO). The government anticipates generating Rs 63,000-66,000 crore from the proposed share sale, contributing towards its disinvestment target of Rs 78,000 crore for FY 2021-22. Established in 1956, LIC is a government-owned entity with the largest share in India’s insurance business.
Disinvestment Explained
Disinvestment generally refers to the government partially or fully selling assets of a state-owned enterprise. This strategic move is either for the company’s benefits or raising resources to meet certain needs.
Key Points Regarding The Amendment
Presently, there are no specific provisions for foreign investment in LIC, a statutory corporation established under LIC Act, 1956. While last year’s raised FDI limit for the insurance sector was hiked from 49% to 74%, it did not pertain to LIC. Considering this, the government has now decided to permit foreign investment up to 20% for LIC and other corporate bodies.
The Significance of FDI Policy Reform
The amendment in the FDI policy facilitates foreign investments in LIC and other corporations, providing them with additional capital for disinvestment purposes. The change ensures a smooth process for foreign investors subscribing to the public offer. The amendment aims to simplify business operations, attract more FDI and align with the broader FDI policy objectives.
Impact of Increased FDI
Increased FDI inflows will supplement domestic capital, technology transfer, and skill development for faster economic growth. This supports the implementation of Atmanirbhar Bharat and allows foreign portfolio investors to buy shares in the secondary market, sending a positive signal to investors.
Current Status of FDI Inflows in India
India saw its FDI inflows increase from USD 45.15 billion in 2014-2015 to USD 81.97 billion in 2020-21. This 10% rise compared to the previous financial year occurred despite the Covid-19 pandemic.
Understanding FDI and Its Routes
FDI involves residents of one country acquiring assets for control over another country’s firm’s activities. It differs from Foreign Portfolio Investment (FPI), where a foreign entity merely buys a company’s stocks and bonds without gaining control over the business.
India welcomes FDI through two routes: the Automatic Route and the Government Route. The former does not require prior approval from the government or RBI, while the latter necessitates government approval. The Foreign Investment Facilitation Portal (FIFP) facilitates the single window clearance of applications that are through the approval route.
To sum up, the proposed FDI policy amendment marks a significant step towards greater foreign participation in India’s insurance sector. By inviting more international investors into the LIC fold, the move is slated to contribute significantly to India’s economic growth.