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CHAPTER 1
INTRODUCTION OF INSURANCE

1.1 INTRODUCTION
Insurance is a system to alleviate financial losses by
transferring risk of loss from one entity to another.
Insurance is basically a sharing device. The losses to assets
resulting from natural calamities like fire, flood, earthquake,
accidents, etc. are met out of the common pool contributed by large
number of persons who are exposed to similar risks. This
contribution of many is used to pay the losses suffered by
unfortunate few. However the basic principle is that loss should
occur as a result of natural calamities or unexpected events which
are beyond the human control. Secondly insured person should not
make any gains out of insurance.
It is natural to think of insurance of physical assets such as motor
car insurance or fire insurance but often we forget that creator of all
these assets is the human being whose efforts have gone a long
way in building up the assets. In that sense, human life is a unique
income generating assets. Unlike the physical assets, which
decrease in value with passage of time, the individual becomes
more experienced and more matured as he advances in age. This
raises his earning capacity and the purpose of life insurance is to
protect the income in the event of his premature death. The
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individual himself also needs financial security for the old age or on
his becoming permanently disabled when his income will stop.
Insurance also has an element of savings in certain cases.
DEFINITIONS:Functional definition
Insurance is a co-operative device to spread the loss caused by a
particular risk over a number of persons who are exposed to it and
who agree to insure themselves against the risk.
General Definition
Insurance has been defined to be that in which a sum of money as a
premium is paid in consideration of the insurers incurring the risk of
paying a large sum upon a given contingency.
In the words of John Magee, Insurance is a plan by themselves
which large number of people associate and transfer to the
shoulders of all, risks that attach to individuals.
Fundamental Definition
In the words of D.S. Hansell, Insurance accumulated contributions
of all parties participating in the scheme.
Contractual Definition
In the words of Justice Tindall, Insurance is a contract in which a
sum of money is paid to the assured as consideration of insurers
incurring the risk of paying a large sum upon a given contingency.

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1.2 WORKING FOR INSURANCE


Suppose there are 1000 persons all aged 35 years and healthy lives.
They are insured for one year against the risk of death. Each person
is insured for Rs. 50,000. If the past experience indicated that 4 out
of 1000 persons, at this age are expected to die during the year,
expected amount of death claim to be paid to the family of four
persons would come to Rs. 2, 00,000. The contribution to be paid by
each of the 1000 persons will come to Rs. 200 per year. Thus, all the
1000 persons share loss caused to the 4 unfortunate families. 996
persons who survived till one year have not lost anything as they
secured peace of mind and a feeling of security of their family.
While insurance cannot prevent accidents or premature death, it can
help protect the family of the decreased against the loss of income
caused by the death of the main breadwinner. In return for specified
payments, insurance will provide protection against the incidence of
an uncertain event- such as premature death.
The business of insurance company called insurer is to bring
together

persons

who

are

exposed

to

similar

risks,

collect

contribution (premium) from them on some equitable basis and pay


the losses (claims) to the unfortunate few who suffer.

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1.3 NEED FOR LIFE INSURANCE

Risks and uncertainties are part of life's great adventure -- accident,


illness, theft, natural disaster - they're all built into the workings of

the Universe, waiting to happen.


Insurance then is man's answer to the vagaries of life. If you cannot
beat man-made and natural calamities, well, at least be prepared

for them and their aftermath.


Insurance is a contract between two parties - the insurer (the
insurance company) and the insured (the person or entity seeking
the cover) - wherein the insurer agrees to pay the insured for
financial losses arising out of any unforeseen events in return for a

regular payment of "premium".


These unforeseen events are defined as "risk" and that is why
insurance is called a risk cover. Hence, insurance is essentially the

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means to financially compensate for losses that life throws at people

- corporate and otherwise.


The principle of insurance works on the concept of a large number
of people exposed to a similar risk making a contribution to a
common fund. Those who suffer losses due to the occurrence of
these events are compensated for them from this fund.
WHY PRIVATE INSURANCE?

All the private companies have a lock in period of 3 yrs hence no


disinvestments possible.

Minimum net worth of 500 Cr required for acquiring license with a


minimum paid up capital of 100 Cr in their insurance venture.

Commitment to increase the paid up capital manifold in next five


years.

Re insurance for all its policies worth more than 5 lakhs.


Reinsurance partners, best and the largest in the world general
cologne and Swiss reinsurance.

Audit of accounts by at least 2 independent approved auditors each


year.

Products and pricing are cleared by IRDA, which looks into the
financial visibility of the product and the financial implication.

IRDA is now proposing a Pvt. Policy Protection fund.

Funds to be invested in only regulated and controlled areas with


close to 80%being pumped into only gilts thereby assuring safety of
funds.

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1.4 INSURANCE INDUSTRY: CLASSIFICATION

MGIMFL
OAENAI
TRNSDRF
OIEUIE
RNC
EALI
VILNAN
EICIS
HNEMU
ISR
CUNA
LRDN
EAUC
NSE
CT
ER
Y

I.

LIFE INSURANCE:

This is provided for the payment of sum money on the death of the
insured person due to natural causes or on the expiry of a certain
number of years if the insured person is then alive. Life insurance
aims to compensate the Income Earning Capacity of the person. In
Life Insurance, income earning capacity of the person is covered.
The loss of the income earning capacity can be on the happening of
the following events when the life is assured.
1.
2.
3.
4.

Death.
Sickness (critical illness).
Accident (Death or permanent disability due to accident).
Retirement.

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GENERAL INSURANCE:

Insurance other than life fall under general insurance. It covers loss
of every other physical or no possession. The loss may be due to
fire, theft, accident etc. The general insurance is further classified
into1.
2.
3.
4.

Fire insurance.
Marine Insurance.
Mediclaim
Vehicle Insurance.

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PRODUCTS
Insurance Plans:
Plans:

Childrens Plan
Back Plans

Whole Life Plan


Life

Endowment Plans

Term Assurance

Special Plan:
Plan:

Jeevan Rekha
Jeevan Anand
Pension Plan:
Plan:

Money

Joint

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Deferred Annuity Plan with life Cover


Deferred Annuity Plan without life Cover

1.5 EMERGING TREND IN INDIAN INSURANCE


SECTOR
Market by 2015, particularly in countries like India and China. The
IRDA is the major body, which is providing better opportunities for
the private player in India. GIC & LIC's monopoly market approach is
no more prevalent in India. The new market scenario for insurance is
growing; no doubt it is a flying bird.
Change is the eternal law of nature. Everything is changing
according to the need of the time. Economic growth and social
development in present scenario is due to sudden change in
industrial policy and economic planning. Globalization has been the
basic mantra after 1991, so everyone thinks of being global.
Liberalization, privatization and globalization are the basic concept
of success in all aspect of development. Competition is tough now
due to globalization. Business has positioned the entire economy,
and industrialists think about making things global.

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There are no stringent rules or regulations for making any business


house or industry. Government gives more emphasis on export and
entrepreneurship. This is a changing world. Everyone has to
compete for better success. Marketing is the major concept for
developing any type of business. After globalization, marketing has
taken a new dimension and it is the most challenging task now. The
new horizon of marketing in the field of finance and insurance in
present scenario is a good sign of development.

1.6 GLOBALIZATION OF INSURANCE MARKET


Historically, insurance has been an integral part of financial services
system and recognized as a corner-stone of a country's financial
health and symbol of progress. Insurance provides for the financial
security of citizens and their families. It offers valuable investment
advice and serves as an effective step towards both individual and
national financial stability.
After the terrorist attack on the World Trade Center in September
2001, the momentum of growth of world economy suffered some
temporary setback. According to 3rd Annual Globalization Index
Report of World Watch Institute, the growth rate fell sharply from 4%
in 2000 to 1.3% in 2001. But the world had become stabilized after
that and the economic growth was back with entry of so many MNCs
and insurances.

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Triggered by the sound fundamentals in global economy and


internationalization of world markets, several countries turned
towards free market regimes in banking and insurance, putting an
end to several decade-old state-owned controlled markets. The
insurance market in China & India is brighter. The leading
reinsurance company like Swiss Re & Munich Re has projected 2025% growth in life and health insurance market by 2015, particularly
in countries like India & China.
After 1970, insurance sector has become more prosperous. For a
long time, the two most important insurance players were LIC & GIC.
Now so many MNCs have entered into the same sector like Bajaj
Allianz, Aviva, Birla Sunlife, ICICI Prudential, etc. Insurance is now
acting on two dimensions, i.e., the element of investment and the
element of protection. The Economic Value Addition (EVA) has taken
the major concern of the same business.

Marketing after globalization has become:

More customer oriented

Mostly better service oriented

More competitive

Better satisfaction, more value addition and strategic development


can help any insurance sector to sustain in the present era.

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1.7 TECHNOLOGY TREND IN INSURANCE MARKET.


1. Computerization:-

Initially, in the late 1950s the insurance companies used Unit


Record Machines (Electro Magnetic Machines) to process data
punched into cards. Computers were introduces in the mid
1960s and by the 1980s the Unit Phased Machines were
phased out and the entire process was computerized. This
brought about greater efficiency and quick service delivery
2. Internet:Today, the internet has completely changed the service
delivery process. Internet is today used to even sell insurance
policies. Internet is, in fact, proving to be one of the widely
used distribution networks for selling insurance policies. Also
internet is used for sending premium notices to policy holders
through e-mails
3. Electronic Clearance Service (ECS):Almost all the big organizations today provide the ECS facility
to its customers. A policy holder having an account in any
bank which is a member of the local clearing house can opt for
ECS debit to pay premiums. The advantage here is that once
the option is exercised, the policy holder need not visit a
branch for paying the premium or collecting the receipts. On
the day indicated by the policy holder, the premium amount

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will be directly debited to the bank account of the policyholder


and the receipt will be issued by the designated branch office.

4. Call Centers and SMS services:Almost all the insurance companies have their own call
centres which cater to the phone based queries of the
policyholders. This service is 24x7 and they have the
Interactive Voice Response (IVR) systems at all the branches.

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CHAPTER 2
FOREIGN DIRECT INVESTMENT

2.1 INTRODUCTION
The Insurance sector reforms have open in the door for private
players, private insurance companies in the beginning of life
insurance business with public sector company (LIC). Foreign Direct
Investment (FDI) has allowed in private life insurance companies in
India, under an act of IRDA with a limit of foreign equity of 26%.The
life insurance sector is playing a pivotal role in both Indian and
Global markets. Those factor we have taken for the analysis of
private life insurance companies performance are premium growth,
market share of the companies, portfolio Investment, equity share
capital etc. It is use for a measure of positive or negative impact of
FDI investment in Indian private life insurance companies. It has
investigated for a sample of five selected private life insurance
companies and one public company for the purpose to comparison
with selected companies it is using a panel data for analysis in
between the period of 2002-10. Different key variable is use to
analysis yearly premium income, infrastructure development,
employee facilities, business expansion etc. it was examined to
identify cause for any significant impact on the life insurance sector.

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With the deregulation of insurance industry in India since 1999,


private players have got an opportunity to enter in an insurance
markets. Prior to its deregulation, the life insurance business was
dominated by the public sector company is life insurance
Corporation of India. While liberalization of insurance sector, as
many as twelve new private life insurance companies were entered
with the help of foreign equity up to 26 per cent in the life insurance
business apart from the HDFC standard life, which has stand foreign
equity only 18.6% in the beginning of insurance business, in the
present time there are entire 22 private life insurance companies
operating business in India, their in we have selected five private
life insurance companies, as like ICICI prudential life insurance
(2000), HDFC standard life (2000), Aviva life (2002), SBI life
insurance (2001), TATA life insurance (2001).
They are entire companies is playing a vital role in life insurance
business with motive for exist and prospective customers to provide
better facilities in lives saving scheme, future security, investment
plan, funds investment etc. Consequently, the public-sector
company has been face towards countering the challenges posed by
the entered new players in the same business.
The private players have been striving to build confidence in
customers and get a foothold in the markets. In competitive
markets, life insurance companies come out with innovative and
attractive life insurance products, and they are trying to reach
customers through various techniques.
Generally speaking FDI refers to capital inflows from abroad that
invest in the production capacity of the economy and are usually
preferred over other forms of external finance because they are nondebt creating, non-volatile and their returns depend on the
performance of the projects financed by the investors. FDI also
facilitates international trade and transfer of knowledge, skills and
technology.
India's foreign investment policy is fairly liberal, allowing up to 100%
foreign investment in most sectors. However, some sectors have
caps on FDI. The government also imposes caps on portfolio
investments, within the FDI caps or separately, to cap total foreign
equity in certain sectors. These caps apply mainly in areas
considered strategic or sensitive, as well as to any investments

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considered to have national-security implications. In most sectors,


investment up to the caps is permitted on the "automatic route",
meaning that companies need only file papers with the central bank
after investing. In areas that the government wants to monitor more
closely, prior approval is necessary from the Foreign Investment
Promotion Board.
Foreign Direct Investment in India is allowed through four basic
routes namely, financial collaborations, technical collaborations and
joint ventures, capital markets via Euro issues, and private
placements or preferential allotments. FDI inflow helps the
developing countries to develop a transparent, broad, and effective
policy environment for investment issues as well as, builds human
and institutional capacities to execute the same. The insurance
sector is of considerable importance to every developing economy;
it inculcates the savings habit, which in turn generates long-term
investible funds for infrastructure building. The nature of insurance
business ensures constant inflow of funds - the payout is staggered
and contingency related - thereby making it readily available for
investment on infrastructure building. Its contribution to GDP is
quite significant.
The Union government had opened up the insurance sector for
private participation in 1999, also allowing the private companies to
have foreign equity up to 26 per cent.
Regulation 11 of Insurance Regulatory and Development Authority
(Registration of Indian Insurance Companies) Regulations, 2000
states that calculation of the holding of equity shares by a foreign
company either by itself or through its subsidiary companies or its
nominees referred to as foreign investor) in the applicant company,
shall be made as under and shall be aggregate of:

The quantum of paid up equity share capital held by the


foreign company either by itself or through its subsidiary
companies or nominees in the applicant company;
The quantum of paid up equity share capital held by other
foreign investors, non-resident Indians, overseas corporate
bodies and multinational agencies in the applicant company;
and
The quantum represented by that proportion of the paid up
equity share capital to the total issued equity capital of an

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Indian promoter company mentioned in sub-clause (i) of


clause (g) of regulation 2 held or controlled by the category of
persons mentioned in the two clauses above.
For purposes of calculation referred to above, account need not be
taken of the holdings of equity in an Indian promoter company held
by foreign institutional investors, other than the foreign promoters
of the applicant and their subsidiaries and nominees, and Indian
mutual funds to the extent the investment of foreign institutional
investors and Indian mutual funds are within the approved limits laid
down by the Securities and Exchange Board of India under its rules,
regulations or guidelines issued from time to time.

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2.2 INTENT AND OBJECTIVE


It is the intent and objective of the Government of India to attract
and promote foreign direct investment in order to supplement
domestic capital, technology and skills, for accelerated economic
growth. Foreign Direct Investment, as distinguished from portfolio
investment, has the connotation of establishing a lasting interest in
an enterprise that is resident in an economy other than that of the
investor.
The Government has put in place a policy framework on Foreign
Direct Investment, which is transparent, predictable and easily
comprehensible. This framework is embodied in the Circular on
Consolidated FDI Policy, which may be updated every year, to
capture and keep pace with the regulatory changes, effected in the
interregnum. The Department of Industrial Policy and Promotion
(DIPP), Ministry of Commerce & Industry, Government of India
makes policy pronouncements on FDI through Press Notes/ Press
Releases which are notified by the Reserve Bank of India as
amendments to the Foreign Exchange Management (Transfer or
Issue of Security by Persons Resident Outside India) Regulations,
2000 (notification No.FEMA 20/2000-RB dated May 3, 2000). These
notifications take effect from the date of issue of Press Notes/ Press
Releases, unless specified otherwise therein. In case of any conflict,
the relevant FEMA Notification will prevail. The procedural
instructions are issued by the Reserve Bank of India vide A.P. Dir.
(series) Circulars. The regulatory framework, over a period of time,
thus, consists of Acts, Regulations, Press Notes, Press Releases,
Clarifications, etc.

The present consolidation subsumes and supersedes all Press


Notes/Press Releases/Clarifications/ Circulars issued by DIPP, which
were in force as on April 09, 2012, and reflects the FDI Policy as on
April 10, 2012. This Circular accordingly will take effect from April
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10, 2012. Reference to any statute or legislation made in this


Circular shall include modifications, amendments or re-enactments
thereof.
Notwithstanding the rescission of earlier Press Notes/Press
Releases/Clarifications/Circulars, anything done or any action taken
or purported to have been done or taken under the rescinded Press
Notes/Press Releases/Clarifications/Circulars prior to April 10, 2012,
shall, in so far as it is not inconsistent with those Press Notes/Press
Releases/Clarifications/Circulars, be deemed to have been done or
taken under the corresponding provisions of this circular and shall
be valid and effective.

2.3 GENERAL CONDITIONS ON FDI


A non-resident entity (other than a citizen of Pakistan or an entity
incorporated in Pakistan) can invest in India, subject to the FDI
Policy. A citizen of Bangladesh or an entity incorporated in
Bangladesh can invest only under the Government route.
NRIs resident in Nepal and Bhutan as well as citizens of Nepal and
Bhutan are permitted to invest in the capital of Indian companies on
repatriation basis, subject to the condition that the amount of
consideration for such investment shall be paid only by way of
inward remittance in free foreign exchange through normal banking
channels.
OCBs have been derecognized as a class of investors in India with
effect from September 16, 2003. Erstwhile OCBs which are
incorporated outside India and are not under the adverse notice of
RBI can make fresh investments under FDI Policy as incorporated
non-resident entities, with the prior approval of Government of India
if the investment is through Government route; and with the prior
approval of RBI if the investment is through Automatic route.
An FII may invest in the capital of an Indian Company under the
Portfolio Investment Scheme which limits the individual holding of
an FII to 10% of the capital of the company and the aggregate limit
for FII investment to 24% of the capital of the company. This
aggregate limit of 24% can be increased to the sectoral
cap/statutory ceiling, as applicable, by the Indian Company

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concerned through a resolution by its Board of Directors followed by


a special resolution to that effect by its General Body and subject to
prior intimation to RBI. The aggregate FII investment, in the FDI and
Portfolio Investment Scheme, should be within the above caps.
The Indian company which has issued shares to FIIs under the FDI
Policy for which the payment has been received directly into
companys account should report these figures separately under
item no. 5 of Form FC-GPR (Annex-1).
A daily statement in respect of all transactions (except derivative
trade) has to be submitted by the custodian bank in floppy / soft
copy in the prescribed format directly to RBI.
Only SEBI registered FII and NRIs as per Schedules 2 and 3
respectively of Foreign Exchange Management (Transfer or Issue of
Security by a Person Resident Outside India) Regulations 2000, can
invest/trade through a registered broker in the capital of Indian
Companies on recognised Indian Stock Exchanges.
A SEBI registered Foreign Venture Capital Investor (FVCI) may
contribute up to 100% of the capital of an Indian Venture Capital
Undertaking (IVCU) and may also set up a domestic asset
management company to manage the fund. All such investments
can be made under the automatic route in terms of Schedule 6 to
Notification No. FEMA 20. A SEBI registered FVCI can invest in a
domestic venture capital fund registered under the SEBI (Venture
Capital Fund) Regulations, 1996. Such investments would also be
subject to the extant FEMA regulations and extant FDI policy
including sectoral caps, etc. SEBI registered FVCIs are also allowed
to invest under the FDI Scheme, as non-resident entities, in other
companies, subject to FDI Policy and FEMA regulations.
Further, FVCIs are allowed to invest in the eligible securities (equity,
equity linked instruments, debt, debt instruments, debentures of an
IVCU or VCF, units of schemes / funds set up by a VCF) by way of
private arrangement / purchase from a third party also, subject to
terms and conditions as stipulated in Schedule 6 of Notification No.
FEMA 20 / 2000 -RB dated May 3, 2000 as amended from time to
time. It is also being clarified that SEBI registered FVCIs would also
be allowed to invest in securities on a recognized stock exchange
subject to the provisions of the SEBI (FVCI) Regulations, 2000, as

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amended from time to time, as well as the terms and conditions


stipulated therein.
QFls are permitted to invest through SEBI registered Depository
Participants (DPs) only in equity shares of listed Indian companies
through recognized brokers on recognized stock exchanges in India
as well as in equity shares of Indian companies which are offered to
public in India in terms of the relevant and applicable SEBI
guidelines/regulations. QFls are also permitted to acquire equity
shares by way of right shares, bonus shares or equity shares on
account of stock split / consolidation or equity shares on account of
amalgamation, demerger or such corporate actions subject to the
prescribed investment limits. QFIs are allowed to sell the equity
shares so acquired subject to the relevant SEBI guidelines.
The individual and aggregate investment limits for the QFls shall be
5% and 10% respectively of the paid up capital of an Indian
company. These limits shall be over and above the FII and NRI
investment ceilings prescribed under the Portfolio Investment
Scheme for foreign investment in India. Further, wherever there are
composite sectoral caps under the extant FDI policy, these limits for
QFI investment in equity shares shall also be within such overall FDI
sectoral caps.
Dividend payments on equity shares held by QFls can either be
directly remitted to the designated overseas bank accounts of the
QFIs or credited to the single rupee pool bank account. In case
dividend payments are credited to the single rupee pool bank
account they shall be remitted to the designated overseas bank
accounts of the QFIs within five working days (including the day of
credit of such funds to the single rupee pool bank account). Within
these five working days, the dividend payments can be also utilized
for fresh purchases of equity shares under this scheme, if so
instructed by the QFI.

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2.4 COST INVOLVED IN FDI


2.4.1 FOR HOST COUNTRY
Inflow of Foreign investment improves balance of payments position
while outflow due to imports, dividend payments, technical service
fees, royalty reduces balance of payments position. Use of imported
raw materials may be harmful to the interest of the domestic
country whereas it may be useful to the interests of the foreign
country. Supply of technology to the host country makes it
dependent on the home country resulting in the payment of higher
price for acquisition. The technology may not be suitable to the local
environment causing substantial loss to the host country. MNCs are
reluctant to hire and train local persons. Advanced technology being
capital intensive does not ensure bigger job prospects Foreign
investors do not care to follow pollution standards nor do they stick
to the optimal use of natural resources nor have any concern about
location of industries while opting for a manufacturing process. Such
violation affects host nations interest. Domestic industries cannot
withstand the financial power exercised by the foreign investors and
thereby die a pre-mature death. Because of their oligopolistic
position in the market, foreign companies charge higher prices of
their products. Higher prices dampen the spirit of the buyers and at
the same time lead to an inflationary pressure. Foreign culture is
infused by these foreign companies in industrial units as well as to
the society at large. Governmental decisions fall prey to such
measures as they become a dominant force to reckon with.
2.4.2 FOR HOME COUNTRY
Cost involvement for the home country is a paltry sum. Any foreign
investment causes a transfer of capital, skilled personnel and
managerial talent from the country resulting in the home countrys
interest being hampered. MNCs have the primary objective of
maximising their overall profit while operating in different countries.
The standards followed by them in most cases are not beneficial to
the most nation. Such an action leads to deterioration in bilateral
relations between host and home country.
FDI is a mixed bag of bright features and dark spots. So it requires
careful handling by both sides.

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2.5 BENEFITS OF FDI


2.5.1 FOR HOST COUNTRY
Improves balance of payment position by creating the inflow of
investment of capital account. Also current account improves as FDI
ads import substitution/export promotion. Exports get a boost
through the expertise of foreign investors possessing export market
intelligence and their mechanism. Updated technology of producing
world standard goods at low cost are available to the host country.
Export credits from the cheapest source in the international market
can be availed of quite easily.
Foreign firms foster forward and backward economic linkages.
Demand for various inputs give rise to the development of the
supplying industries which through employment of labour force raise
their income and increase the demand for domestic industrial
production. The living standard of the domestic consumers improves
as quality products at competitive prices are available. Also a pool
of trained personnel is created in this context.
Foreign investors by investing in economic / social infrastructure,
financial markets and marketing systems helps the host country to
develop a support base essential for quick industrialization. The
presence of foreign investors creates a multiplies effect leading to
the emergence of a sound support system.
Foreign investors are a boon to government to revenue with regard
to the generation of additional income tax. Also they pay tariff on
their imports. Government expenditure requirements are greatly
reduced through supplementing governments investment activities
in a big way there by lessening the burden on national budget.
FDI aids to maintain a proper balance amongst the factors of
production by the supply of scarce resources thereby accelerating
economic growth. Capital brought in by FDI supplements domestic
capital as the savings rate at home is very low to augment heavy
investment. Through the inflow of scarce foreign exchange,
domestic saving get a boost to support the investment process.
Foreign investors are bold enough to take risks not prevalent among
local investors resulting in investment projects being implemented
in a large way. FDIs bring in skilled labour force to perform jobs
which the local workers are unable to carry out. There is also a fear

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of imposition of alien culture being imposed on the local labour


force. Foreign investors make available key raw materials along with
updated technology to the host country Such a practice helps the
host country to obtain access to continued updation of R & D work
of the investing country.
2.5.2 FOR HOME COUNTRY
The home country gets the benefits of the supply of raw materials if
FDI helps in its exploitation. BOP improves due to the parent
company getting dividend, royalty, technical service fees and also
from its increased exports to the subsidiary. Also there is
employment generation and the parent company enters into newer
financial markets by its investment outside. The government of the
home country increases its revenue income of the parent
organization, imposition of tariff on imports of the parent company
from its foreign subsidiary. FDI helps to develop closer political
relationship between the home and the host country which is
advantageous to both.
2.5.3 ADVANTAGES TO THE FOREIGN INVESTOR

India emerging as a major global player the rapid growth of


its economy on a worldwide scale, particularly the services
and information technology sector, provide ample opportunity
for foreign investors
Deregulation n India Inward FDI trends have been increasing
ever since the reform in FDI regime which has provided
simplified procedures and policies, with foreign investors
facing less restrictions.
Incentives to promote investments e.g. government subsidies,
attractive borrowing rates
Efficiency-seeking investments i.e. lower production costs
Market-seeking investments i.e. fast-growing population and
economy

2.6 TYPES OF INSTRUMENTS.


Indian companies can issue equity shares, fully, compulsorily and
mandatorily convertible debentures and fully, compulsorily and
mandatorily convertible preference shares subject to pricing
guidelines/valuation norms prescribed under FEMA Regulations. The
price/ conversion formula of convertible capital instruments should

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be determined upfront at the time of issue of the instruments. The


price at the time of conversion should not in any case be lower than
the fair value worked out, at the time of issuance of such
instruments, in accordance with the extant FEMA regulations [the
DCF method of valuation for the unlisted companies and valuation in
terms of SEBI (ICDR) Regulations, for the listed companies].
Other types of Preference shares/Debentures i.e. non-convertible,
optionally convertible or partially convertible for issue of which
funds have been received on or after May 1, 2007 are considered as
debt. Accordingly all norms applicable for ECBs relating to eligible
borrowers, recognized lenders, amount and maturity, end-use
stipulations, etc. shall apply. Since these instruments would be
denominated in rupees, the rupee interest rate will be based on the
swap equivalent of London Interbank Offered Rate (LIBOR) plus the
spread as permissible for ECBs of corresponding maturity.
The inward remittance received by the Indian company vide
issuance of DRs and FCCBs are treated as FDI and counted towards
FDI.
Issue of shares by Indian Companies under FCCB/ADR/GDR
Indian companies can raise foreign currency resources abroad
through the issue of FCCB/DR (ADRs/GDRs), in accordance with the
Scheme for issue of Foreign Currency Convertible Bonds and
Ordinary Shares (Through Depository Receipt Mechanism) Scheme,
1993 and guidelines issued by the Government of India there under
from time to time.
A company can issue ADRs / GDRs if it is eligible to issue shares to
persons resident outside India under the FDI Policy. However, an
Indian listed company, which is not eligible to raise funds from the
Indian Capital Market including a company which has been
restrained from accessing the securities market by the Securities
and Exchange Board of India (SEBI) will not be eligible to issue
ADRs/GDRs.
Unlisted companies, which have not yet accessed the ADR/GDR
route for raising capital in the international market, would require
prior or simultaneous listing in the domestic market, while seeking
to issue such overseas instruments. Unlisted companies, which have
already issued ADRs/GDRs in the international market, have to list in

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the domestic market on making profit or within three years of such


issue of ADRs/GDRs, whichever is earlier. ADRs / GDRs are issued on
the basis of the ratio worked out by the Indian company in
consultation with the Lead Manager to the issue. The proceeds so
raised have to be kept abroad till actually required in India. Pending
repatriation or utilization of the proceeds, the Indian company can
invest the funds in:Deposits, Certificate of Deposits or other instruments offered by
banks rated by Standard and Poor, Fitch, IBCA ,Moody's, etc. with
rating not below the rating stipulated by Reserve Bank from time to
time for the purpose;
Deposits with branch/es of Indian Authorized Dealers outside India;
and
Treasury bills and other monetary instruments with a maturity or
unexpired maturity of one year or less.
There are no end-use restrictions except for a ban on deployment /
investment of such funds in real estate or the stock market. There is
no monetary limit up to which an Indian company can raise ADRs /
GDRs.
The ADR / GDR proceeds can be utilized for first stage acquisition of
shares in the disinvestment process of Public Sector Undertakings /
Enterprises and also in the mandatory second stage offer to the
public in view of their strategic importance.
Voting rights on shares issued under the Scheme shall be as per the
provisions of Companies Act, 1956 and in a manner in which
restrictions on voting rights imposed on ADR/GDR issues shall be
consistent with the Company Law provisions. Voting rights in the
case of banking companies will continue to be in terms of the
provisions of the Banking Regulation Act, 1949 and the instructions
issued by the Reserve Bank from time to time, as applicable to all
shareholders exercising voting rights.
Erstwhile OCBs who are not eligible to invest in India and entities
prohibited from buying, selling or dealing in securities by SEBI will
not be eligible to subscribe to ADRs/ GDRs issued by Indian
companies.

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The pricing of ADR / GDR issues should be made at a price


determined under the provisions of the Scheme of issue of Foreign
Currency Convertible Bonds and Ordinary Shares (through
Depository Receipt Mechanism) Scheme, 1993 and guidelines issued
by the Government of India and directions issued by the Reserve
Bank, from time to time.
The pricing of sponsored ADRs/GDRs would be determined under
the provisions of the Scheme of issue of Foreign Currency
Convertible Bonds and Ordinary Shares (Through Depository Receipt
Mechanism) Scheme, 1993 and guidelines issued by the
Government of India and directions issued by the Reserve Bank,
from time to time.
Two-way Fungibility Scheme: A limited two-way Fungibility scheme
has been put in place by the Government of India for ADRs / GDRs.
Under this Scheme, a stock broker in India, registered with SEBI, can
purchase shares of an Indian company from the market for
conversion into ADRs/GDRs based on instructions received from
overseas investors. Re-issuance of ADRs / GDRs would be permitted
to the extent of ADRs / GDRs which have been redeemed into
underlying shares and sold in the Indian market.
Sponsored ADR/GDR issue: An Indian company can also sponsor an
issue of ADR / GDR. Under this mechanism, the company offers its
resident shareholders a choice to submit their shares back to the
company so that on the basis of such shares, ADRs / GDRs can be
issued abroad. The proceeds of the ADR / GDR issue are remitted
back to India and distributed among the resident investors who had
offered their Rupee denominated shares for conversion. These
proceeds can be kept in Resident Foreign Currency (Domestic)
accounts in India by the resident shareholders who have tendered
such shares for conversion into ADRs / GDRs.
INTERNALTIONAL FINANCIAL INSTRUMENTS
Indian companies have been able to tap global markets to raise
foreign currency funds by issuing various types of financial
instruments which are discussed as follows:
1. Foreign Currency Convertible Bonds (FCCBs) :
A type of convertible bond issued in a currency different than the
issuers domestic currency. In other words, the money being raise by
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the issuing company is in the form of foreign currency. A convertible


bond is a mix between a debt and equity instrument. It acts like a
bond by making regular coupon and principal payments, but these
bonds also give the bondholder the option to convert the bond into
stock.
These types of bongs are attractive to both investors and issuers.
The investors receive the safety of guaranteed payments on the
bond and are also able to take advantage of any large price
appreciation in the companys stock. (bondholders take advantage
of this appreciation by means of warrants attached to the bonds,
which are activated when the price of the stock reaches a certain
point). Due to the equity side of the bond, which adds value, the
coupon payments on the bond are lower for the company, thereby
reducing its debt-financing costs.
FCCBs is a bond issued in accordance with the guidelines, dated 12 th
November, 1993 as amended from time to time and subscribed for
by non-residents in foreign currency and convertible into ordinary /
equity shares of the issuer company in any manner whether in
whole or in part or on the basis of any equity related warrants
attached to debt instruments.
2. Global Depository Receipts:
A depository receipt is basically a negotiable certificate,
denominated in a currency not native to the issuer, that represents
a the companys publicly traded local currency equity shares. Most
GDRs are denominated in USD, while a few are denominated in Euro
and Pound sterling. The Depository Receipts issued in the US are
called American Depository Receipts (ADRs), which anyway are
denominated in USD and outside of USA, these are GDRs. In theory,
though a depository receipt can also represent a debt instrument, in
practice it rarely does. DRs (depository Receipts) are created when
the local currency shares of an Indian company are delivered to the
depositorys local custodian bank, against which the Depository
bank (such as the Bank of New York) Issues depository receipts in US
dollar. These depository receipts may trade freely in the overseas
markets like any other dollar- denominated security, either on a
foreign stock exchange, or in the over-the-counter market, or among
a restricted group such as Qualified Institutional Buyers (QIBs).
Indian issues have taken the form of GDRs to reflect the fact that

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they are marketed globally, rather than in a specific country or


market. Rule 144A of the Securities and Exchange Commission of
U.S.A permits companies from outside USA to offer their GDRs to
certain institutional buyers. These are known as Qualified
Institutional Buyers (QIBs). There are institutions in USA which, in
the aggregate, own and invest on a discretionary basis at least US
$100 million in eligible securities.
3 Euro-Convertible Bonds (ECBs):
A convertible bond is a debt instrument which gives the holders of
the bond an option to convert the bond into a predetermined
number of equity shares of the company. Usually, the price of the
equity shares at the time of conversion will have a premium
element. The bonds carry a fixed rate of interest. If the issuer
company desires, the issue of such bonds may carry two options viz.
(i)

(ii)

Call Option : (Issuers Option) where the terms of issue of


the bonds contain a provision for call option, the issuer
company has the option of calling (buying) the bonds for
redemption before the date of maturity of the bonds.
Where the issuers share price has appreciated
substantially, i.e. far in excess of the redemption value of
the bonds, the issuer company can exercise the option.
This call option forces the investors to convert the bonds
into equity. Usually, such a case arises when the share
prices reach a stage near 130% to 150% of the conversion
price.
Put Options A provision of put option gives the holder of
the bonds a right to put (sell) his bonds back to the issuer
company at a pre-determined price and date. In case of
Euro-convertible bonds, the payment of interest on and the
redemption of the bonds will be made by the issuer
company in US dollars.

4. American Depository Receipts (ADRs)


Depository Receipts issued by a company in the United States of
America (USA) in known as American Depository Receipts (ADRs).
Such receipts have to be issued in accordance with the provisions
stipulated by the Securities and Exchange Commission of USA
(SEC) which are very stringent.

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An ADR is generally created by the deposit of the securities of a


non-United States company with a custodian bank in the country
of incorporation of the issuing company. The custodian bank
informs the depository in the United States that the ADRs can be
issued. ADRs are United States dollar denominated and are
traded in the same way as are the securities United States
companies. The ADR holder is entitled to the same rights and
advantages as owners of the underlying securities in the home
country.
5 Other Sources
A Euro Bonds
Plain Euro Bonds are nothing but debt instruments. These are
not very attractive for an investor who desired to have
valuable additions to his investments.
B Euro-Convertible Zero Bonds:
These bonds are structured as a convertible bond. No interest
is payable on the bonds. But conversion of bonds takes place
on maturity at a pre-determined price. Usually there is a 5
years maturity period and they are treated a deferred equity
shares.
C. Euro-bonds with Equity Warrants:
These bonds carry a coupon rate determined by the market
rates. The warrants are detachable. Pure bonds are traded at
a discount. Fixed income funds managements may like to
invest for the purposes of regular income.
D. Syndicated bank loans:
One of the earlier ways for raising funds in the form of large
loans from banks with good credit rating, can be arranged in
reasonably short time and with few formalities. The maturity
of the loan can be for a duration of 5 to 10 years. The interest
rate is generally set with reference to an index, say, LIBOR
plus a spread which depends upon the credit rating of the
borrower. Some covenants are laid down by the lending
institution like maintenance of key financial rations.

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E. Euro-Bonds
These are basically debt instruments denominated in a
currency issued outside the country of that currency for
examples yen bond floated in France. Primary attraction of
these bonds is the refuge from tax and regulations and
provide scope for arbitraging yields. These are usually bearer
bonds and can take the form of Traditional fixed rate bonds,
floating rate notes or Convertible bonds.
F. Foreign Bonds:
Foreign bonds are denominated in a currency which is foreign
to the borrower and sold at the country of that currency. Such
bonds are always subject to the restrictions and are placed by
that country on the foreigners funds.
G. Euro Commercial Papers:
These are short term money market securities usually issued
at a discount, for maturities less than one year.
H. Credit Instruments:
The foregoing discussion relating to foreign exchange risk
management and international capital market shows that
foreign exchange operations of banks consists primarily of
purchase and sale of credit instruments. There are many types
of credit instruments used in effecting foreign remittances.
They differ in the speed, with which money can be received by
the creditor at the other end after it has been paid in by the
debtor at his end. The price or the rate of each instruments,
therefore, varies with extent of the loss of interest and risk of
loss involved. There are, therefore, different rates of exchange
applicable to different types of credit instruments.

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2.7 FOREIGN
(FIPB)

PROMOTION

INVESTMENT

BOARD

2.7.1 CONSTITUTION OF FIPB:


FIPB comprises of the following Secretaries to the Government of
India:
(i) Secretary to Government, Department of Economic Affairs,
Ministry of Finance Chairperson
(ii) Secretary to Government, Department of Industrial Policy &
Promotion, Ministry of Commerce & Industry
(iii)Secretary to Government, Department of Commerce, Ministry of
Commerce & Industry
(iv) Secretary to Government, Economic Relations, Ministry of
External Affairs
(v) Secretary to Government, Ministry of Overseas Indian Affairs.
The Board would be able to co-opt other Secretaries to the Central
Government and top officials of financial institutions, banks and
professional experts of Industry and Commerce, as and when
necessary.
2.7.2
LEVELS
OF
GOVERNMENT ROUTE

APPROVALS

FOR

CASES

UNDER

The Minister of Finance who is in-charge of FIPB would consider the


recommendations of FIPB on proposals with total foreign equity
inflow of and below Rs.1200 crore.
The recommendations of FIPB on proposals with total foreign equity
inflow of more than Rs. 1200 crore would be placed for
consideration of CCEA.
The CCEA would also consider the proposals which may be referred
to it by the FIPB/ the Minister of Finance (in-charge of FIPB).
2.7.3 CASES WHICH DO NOT REQUIRE FRESH APPROVAL

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Companies may not require fresh prior approval of the Government


i.e. Minister in-charge of FIPB/CCEA for bringing in additional foreign
investment into the same entity, in the following cases:
(i) Entities the activities of which had earlier required prior approval
of FIPB/CCFI/CCEA and which had, accordingly, earlier obtained prior
approval of FIPB/CCFI/CCEA for their initial foreign investment but
subsequently such activities/sectors have been placed under
automatic route;
(ii) Entities the activities of which had sectoral caps earlier and
which had, accordingly, earlier obtained prior approval of
FIPB/CCFI/CCEA for their initial foreign investment but subsequently
such caps were removed/increased and the activities placed under
the automatic route; provided that such additional investment along
with the initial/original investment does not exceed the sectoral
caps; and
(iii)

Additional foreign investment into the same entity where


prior approval of FIPB/CCFI/CCEA had been obtained earlier
for the initial/original foreign investment due to
requirements of Press Note 18/1998 or Press Note 1 of
2005 and prior approval of the Government under the FDI
policy is not required for any other reason/purpose.

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CHAPTER 3
FDI IN INSURANCE

3.1 ANALYSIS IMPACT OF FDI


In the year 2002-03 public companys (LIC) was collected 546228.49
cr. in the comparison with five selected private sector companies
their were total collection 733.52 cr. we can discus in the year 200405 while total significant collection of public company was 75127.29
and in a comparatives with selected private companies there were
total collection of premium around 4402.29 cr. In the year 2007-08
while total collection of public companies was 149789.99 cr. and
selected private companies there were total collection of premium
27979.99 cr. In during the last session 2009-10 public company has
been collected total premium around 1, 85,985, its comparison of
selected private companies, their were total collection of premium
16,495.86 cr. The huge premium collection have increased every
financial year that was gearing insurance business in India on fast
pace.

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In the comparison of public companys (LIC) and selected private life


insurance companies the given data revealing the impact of foreign
direct investment in private sector companies not a bane, its boon
for life insurance companies. In premium growth has shown their
performance of business proliferation of selected private life
insurance companies, they have been increasing their collection of
premium investment every financial year.

The above table presents the resultant figure of the insurance


companies and its market share that indicate the penetration of life
insurance companies in Indian markets, such penetration indicate
the fruitful growth and its positive result of utilization foreign
investment in life insurance sector. The new players have improved
the service quality of the life insurance. As a result have seen LIC
continuing declining in its career from the year 2000 onward, market
share have been distributing among the private players. In the
financial year 2009-10, LIC still hold 65% market share among doing
business of life insurance companies in India, for upcoming nature of
these private players are gaining strength to give more competition
to LIC in earlier future. Market share of LIC has decreased from 95 %
( 2002-03) to 81% (2004-05), in the financial year 2007-08 still hold
74.39% and following private players hold the rest of the market
share.
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3.2 PROBLEMS
COMPANIES

OF

big bang of fdi in insurance

FDI

IN

INDIA

INSURANCE

In India, FDI in insurance sector is allowed up to 26 % at the present.


But compared to other sectors like call centers, BPOs,
pharmaceuticals, power, hotel and tourism where FDI up to 100% is
allowed, this is much lower.
3.2.1 General Overview of the Problem
There are sub-plots within the main story, as the insurance industry
considers whether or not the FDI cap in the insurance sector will
actually be raised. The common man's picture of the fight for FDI
was seen solely as a political one -- where the Left is acting
spoilsport in raising the FDI cap from the current 26 per cent to 49
per cent. The reality, however, is that the industry is as divided as
the political parties. Indian corporate chiefs like Deepak Parekh and
Rahul Bajaj are keen to dilute their holding in their respective
insurance joint ventures. At the same time, they want to maintain
their majority stakes.
It is the smaller players who are eager for a hike in the FDI cap. The
current FDI limit will restrict the growth of private insurance players
because a sizeable working capital is required, points out Philip G
Scott, group executive director, Aviva Plc. He admits that growth at
Aviva could suffer. "We have contingency plans in place but in a
worst-case scenario, business will need to grow much more slowly if
FDI is not raised," he adds. Aviva is a 26:74 joint venture with the
Dabur group.
Foreign partners are equally keen to increase their share in
insurance joint ventures to make current investments worthwhile.
"Raising the FDI cap will give confidence to foreign investors to do
business on a scale that is not restrictive," says Sunil Mehta, country
head, AIG. His view is shared by a number of global chiefs who have
of late visited India and met the regulator. There is some hesitancy
among international investors who have a limited appetite to invest
in equity capital, bring in the necessary IT and expertise, when they
can have only 26 per cent stake. "There are many more choices for
us globally to deploy capital where we can best achieve the interest
of shareholders," says Aviva's Scott.

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Another development, which is adding to the discomfort to foreign


players, is the acute shortage of domestic partners which can invest
74% of the initial capital of $22.7 million. This shortage of domestic
players has increased the valuation of the stakes to be hold by
domestic players. The overseas partners are prepared to pay high
premium from the day one to the domestic partner and if it is ready
to pull out of the existing partner the valuation stake is still higher.
This is also luring the domestic players to look for a new partner.
3.2.2 Problems of Raising the Capt to 49%.
At the moment, Indian promoters are apprehensive that should FDI
be raised, foreign partners will have an upper hand in the 10th year
of operation. Their concern follows the Insurance Act dictating the
dilution of Indian promoters' stake in favor of the general public.
This means that while Indian promoters would end up holding 26 per
cent according to the IRDA Act, their foreign counterpart could have
a higher stake of 49 per cent. Describing all the impacts of a
potential lifting of the cap is rather tricky, as the main problem with
this policy decision is that it is difficult to separate the costs and
benefits of FDI versus those of increased FDI. There is a "tippingpoint" where the domestic industry loses economic control of the
sector and that is where the cap should be placed. The Indian
government has estimated this point to be 51%, thus placing the
cap at 49%. C S Rao, chairman of Insurance Regulatory and
Development
Authority,
says
in
response
to
industry's
apprehensions that the clause would necessarily be amended, "else
both the shareholders will need to bring down their respective
holding to 26 per cent." The IRDA Act had not visualized foreign
holding rising from the current 26 per cent to 49 per cent.
At the same time, India Inc hopes to make a killing when it sells its
stakes to foreign partners. "Dilution of shareholding will be at a
premium. I cannot see Indian promoters diluting at par after having
put in the majority of funds in the beginning when the venture was
taking off," says Shikha Sharma, managing director, ICICI Prudential
Life Insurance Company. Foreign partners have already indicated
their keenness to raise their stakes, even if it is at a premium.
Prudential Plc, the foreign joint venture partner of ICICI, has beefed
up plans to hike its stake in ICICI Prudential Life Insurance Company.

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3.2.3 Issue of Penetration of Insurance Markets to All


Regions
The insurers of India address issues of poor insurance penetration,
low insurance density with hardly any insurance protection against
natural calamities like droughts, floods, hurricanes and earthquakes.
The insurance market is developing in the region only now and it
has to be nurtured carefully. The nationalized companies did
contribute to the spread of insurance beyond the metropolitan areas
and succeeded in popularizing the concept in rural and semi-urban
areas. There was, however, a huge gap between the potential
available and its exploitation. The public sector companies had
numerous problems such as over-staffing, inadequate infrastructure,
and antiquated procedures. In the absence of competition the
consumer didnt benefit in terms of wider choice, lower price for
insurance cover and adequate level of service. With the adoption of
the Insurance Regulatory and Development Authority (IRDA) Act in
April, 2000, the insurance market was opened up to the private
sector with limited exposure to foreign equity. The insurance
premium in India accounted for a mere 2 per cent of GDP as against
the world average of 7.8% and G-7 average of 9.2% during 90s. The
insurance premium as a percentage of savings in India is 5.95% as
compared to 52.5% in UK. The nationalized insurance companies
could barely unearth the vast potential of the Indian population
since the policies lacked flexibility and the Indian life insurance
products were not linked to the contemporary investment avenues.
The firm belief that it is possible to sustain a high level of growth in
the insurance market in view of the large untapped potential. India
is a nation of a billion people and is one of the fastest growing
economies. It has a large middle class with high household savings
rates and disposable incomes. The size of the family is shrinking and
this section of the population is looking at opportunities for
obtaining appropriate risk cover coupled with maximization of
returns on their investments. Indian economy, predominantly an
agrarian economy, offers enormous growth opportunities for the
insurance sector. As per experts, rural sector can become a
prominent contributor in the overall growth of the insurance
industry in India, provided the needs & occupational structure of
people living in villages is understood.

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3.2.4 Problem of Investment of the Funds collected by the


Insurance Companies
The insurance sector has been an important source of low cost
funds of long-term maturities all over the world. In the Indian
context, however, the insurance companies, particularly in life
insurance, apart from covering risk are also committed to
repayment of the principal with interest although with long
maturities and thereby tend to act as investment funds. One of the
reasons that this has happened is that the average premium
charged by the insurance companies in India tends to be relatively
high due to obsolete and rigid actuarial practices and inefficient
operations. There is pressing need to reorient the insurance sector
in a manner that it fulfills its principal mandate of providing risk
cover. The opening up of the insurance sector to private
participation, including banks in August 2000 has been able to instil
an element of competition which in turn is promoting efficiency and
professionalism and enhancing consumer choice through product
innovation.
In my opinion India is hungry for Long term capital needs to fund the
building of infrastructures, which is the need of the hour.
Infrastructure or the lack of it has been the brake, which have
hindered the leap of the Indian Economy. Despite shortcomings,
Indian Economy has come a long way, but every industry leader
would crib at the infrastructure bottlenecks that they have face
everyday in their effort for growth.
3.2.5 Should the FDI Limit be Increased
The opening up of the cap on FDI investment in India from 26 to
49% has been discussed and re-discussed. The main concerns with
this liberalization are political rather than purely economic in
nature, although there are distributional impacts to be considered.
In my opinion increasing the FDI limit would be an appropriate
measure which would be in the interest of the country. We already
have a strong regulatory body and there are big Insurance
companies already knocking at our doors. Also, LIC is already big
enough that it shouldn't be scared of competition. With the kind of
brand recognition, penetration and trust that LIC commands in India,
it shouldn't really be a big deal.

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Growing steadily, the insurance sector in India is one of the most


talked of sectors amongst the foreign investors. Numerous
opportunities are available in this sector for both domestic as well as
international players. Traversing a full circle, from a liberal
competitive market to nationalization and then back to
liberalization, the insurance sector in India has shown rapid
expansion over the past few years.
Increasing demand of consumer and industrial products and
services plus elimination of a few of the trade and investment
barriers have been the main drivers behind the exponential growth
of the insurance sector in India. By only Increasing the FDI in
Insurance, we could even wait out a little longer on the FDI caps in
other sectors. By increasing the FDI in Insurance that would take
care of the year's FDI target of the country in one go. But that is not
the reason why I say that increasing the FDI in insurance only would
affect a lot of other Industries in a positive way, and that we could
even do without the FDI in many other sectors for some time, Real
estate for one. FDI in insurance would increase the penetration of
Insurance in India, where the penetration of Insurance is abysmally
low with insurance premium at about 3% of GDP against about 8%
global average. This would be through better marketing effort by
MNCs, better product innovation, consumer education and so on. By
more investment in the investment sector, India would get adequate
supply of long term capitals, which India currently needs very badly.
It is to be remembered that people generally invest for long term in
insurance policies, say for around 30 years. From the perspective of
the domestic private players, FDI is instrumental in filling the
savings-investment gap in developing countries, and facilitates
mobility of long-term capital flows into the destination economy.
Thus, a higher FDI cap would lower the entry-level barriers to
insurance as well as allow domestic players to recapitalize their
firms. Also, private sector players in the insurance markets are now
beginning to look at savings-linked and pure risk policies in order to
diversify their markets. These are capital intensive ventures, and
most firms are relying on FDI to provide the required capital.
The impact on the LIC and GIC is again, very controversial. Since
1999, these two companies have seen a turn-around in their levels
of product diversification, service packages and customer service.
They still retain the largest market share in the sector, and many
consumers view this turn-around as positive. Product range and
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diversity has increased substantially since the opening up of the


insurance sector.
The advent of competition has ensured that consumer needs are
catered to, and now there are specific packages that are tailored to
targeted consumer groups. The hiking of the cap will introduce more
players into the market and this would increase consumer surplus
significantly. FDI has been seen to be beneficial to the recipient
nation because of the positive technology spill overs generated.
This is particularly applicable in the Indian context as since the
industry has been opened up, the perception of insurance has
changed from just a practice of "risk reduction" to a method of short
term profit-oriented investment. There are huge varieties of both life
and non-life insurance policies and packages, and measures like
bancassurance, unit linked insurance, savings linked insurance and
the like are being introduced to great success. The entry of a large
number of Indian and Foreign private companies in life insurance
business has to lead greater choice in terms of products and
services. In the years since the IRDA Act initiated market reforms,
the insurance sector has experienced some remarkable changes.
The premium underwritten in India and abroad by life insurers in
2006-07 has grown by 47.38 per cent as against 27.78 per cent in
2005-06. First year premium including single premium accounted for
48.45 per cent of the total life premium, whereas renewal premium
accounted for the remaining. First year premium including single
premium recorded a growth of 94.96 per cent in 2006-07 compared
to 47.94 per cent in 2005-06, driven by a significant jump in the
unit-linked business. The private life insurers have increased their
market share from 14.25 per cent in 2005-06 to 18.08 per cent in
2006-07. This has not affected the growth of LIC, as the premium
collected by LIC in 2006-07 has increased by 40.79 per cent over
the premium collected in 2005-06. In the case of general insurers
the growth was 21.51 per cent as against 15.62 per cent in the
previous year. In 2006-07, the four public sector general insurers
had reported a growth of 8.18 per cent (6.87 per cent in the
previous year) in underwriting of premium within and outside India
whereas eight private sector insurers reported a growth of 61.24 per
cent. The market share of private insurers had increased to 34.72
per cent compared to 26.34 per cent in 2005-06 implying a decline
in the market share of the public sector insurers. The number of
policies underwritten by the private insurers increased by 51.48 per
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cent whereas it declined by 2.25 per cent for public insurers.29 The
position has now gradually changed after the opening of the
insurance sector markets, where in the first 2 years most of the
private companies suffered losses and had a very small share of the
insurance market. Now slowly the private companies by offering
better products in a competitive environment have established their
market share and even though LIC still is the market leader, but its
share is gradually decreasing and private insurers are gaining the
confidence of the consumers.
In the light of these facts, I feel that it is now high time that cap on
FDI in the insurance sector should be increased to 49%.

3.3 FDI POLICY IN INDIA


It is in this context that it is pertinent looking at what the current FDI
policy in India points to. Recently, the Department of Industrial
Policy and Promotion (DIPP) under Indias Ministry of Commerce and
Industry released the Draft Press Note on FDI Regulatory Framework
consolidating all prior regulations on FDI into one document for
comments. It reflects the current regulatory framework on FDI in
India. While the Draft Note confirms that:
The motivation of the direct investor is a strategic long term
relationship with the direct investment enterprise to ensure the
significant degree of influence by the direct investor in the
management of the direct investment enterprise, it goes on clarify
that in India the lasting interest is not evinced by any minimum
holding of percentage of equity capital/shares/voting rights in the
investment enterprise.
Clearly, India is not following the international best practice. The
attempt seems to be to try and capture the broad influence of FDI
inflows in our economies by including all kinds of foreign capital into
the definition of FDI.
This can serve two purposes. Clearly, such a catch-all definition that
treats all foreign investments in Indian companies equity capital as
FDI irrespective of the extent of their share will inflate the FDI inflow
figures. This is surely helpful in cheering up free market advocates
who have been lamenting the smaller amounts of FDI received by

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India in comparison to those received by China and have constantly


been pushing for greater policy liberalization for attracting larger
amounts of FDI into India. Analysts and academicians have already
pointed to the increasing role of private equity in the observed
sharp increase in FDI figures and the increased routing of inflows
through the tax havens in the years since 2005.5 Through a
pioneering analysis of the officially largest 1832 individual cases of
FDI inflows into India during the period 2004-2008, Rao and Dhar
(2010) have just come out with empirical evidence on how FDI
figures in India are indeed an overestimate if one were to consider
the normal Dunning type of FDI.
Separating out private equity (PE) investors and portfolio investors
as well as those controlled by Indians from the FDI category and
considering only Typical FDI that would add to the existing
facilities, they found that only a little less than half of the inflows
could be categorised under the FDI category. They have considered
as FDI only those inflows from foreign investors operating in the
same sectors in their home countries and can be expected to be
long term players and can be expected to bring in not only capital
but also associated benefits and on their own strength.

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CHAPTER 4
FOREIGN INSTITUTIONAL INVESTORS

4.1 INTRODUCTION OF FII


Since 1990-91, the Government of India embarked on liberalization
and economic reforms with a view of bringing about rapid and
substantial economic growth and move towards globalization of the
economy. As a part of the reforms process, the Government under
its New Industrial Policy revamped its foreign investment policy
recognizing the growing importance of foreign direct investment as
an instrument of technology transfer, augmentation of foreign
exchange reserves and globalization of the Indian economy.
Simultaneously, the Government, for the first time, permitted
portfolio investments from abroad by foreign institutional investors
in the Indian capital market. The entry of FIIs seems to be a follow
up of the recommendation of the Narsimhan Committee Report on
Financial System.
While recommending their entry, the Committee, however did not
elaborate on the objectives of the suggested policy. The committee
only suggested that the capital market should be gradually opened
up to foreign portfolio investments. From September 14, 1992 with
suitable restrictions, FIIs were permitted to invest in all the
securities traded on the primary and secondary markets, including
shares, debentures and warrants issued by companies which were
listed or were to be listed on the Stock Exchanges in India. While
presenting the Budget for 1992-93, the then Finance Minister Dr.
Manmohan Singh had announced a proposal to allow reputed
foreign investors, such as Pension Funds etc., to invest in Indian
capital market. To operationalise this policy announcement, it had
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become necessary to evolve guidelines for such investments by


Foreign Institutional Investors (FIIs).

The policy framework for permitting FII investment was provided


under the Government of India guidelines vide Press Note date
September 14, 1992. The guidelines formulated in this regard were
as follows:
1) Foreign Institutional Investors (FIIs) including institutions such as
Pension Funds, Mutual Funds, Investment Trusts, Asset Management
Companies, Nominee Companies and Incorporated/Institutional
Portfolio Managers or their power of attorney holders (providing
discretionary and non-discretionary portfolio management services)
would be welcome to make investments under these guidelines.
2) FIIs would be welcome to invest in all the securities traded on the
Primary and Secondary markets, including the equity and other
securities/instruments of companies which are listed/to be listed on
the Stock Exchanges in India including the OTC Exchange of India.
These would include shares, debentures, warrants, and the schemes
floated by domestic Mutual Funds.
Government would even like to add further categories of securities
later from time to time.
3) FIIs would be required to obtain an initial registration with
Securities and Exchange Board of India (SEBI), the nodal regulatory
agency for securities markets, before any investment is made by
them in the Securities of companies listed on the Stock Exchanges
in India, in accordance with these guidelines. Nominee companies,
affiliates and subsidiary companies of a FII would be treated as
separate FIIs for registration, and may seek separate registration
with SEBI.

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4) Since there were foreign exchange controls in force, for various


permissions under exchange control, along with their application for
initial registration, FIIs were also supposed to file with SEBI another
application addressed to RBI for seeking various permissions under
FERA, in a format that would be specified by RBI for the purpose.
RBI's general permission would be obtained by SEBI before granting
initial registration and RBI's FERA permission together by SEBI,
under a single window approach.
5) For granting registration to the FII, SEBI should take into account
the track record of the FII, its professional competence, financial
soundness, experience and such other criteria that may be
considered by SEBI to be relevant. Besides, FII seeking initial
registration with SEBI were be required to hold a registration from
the Securities Commission, or the regulatory organization for the
stock market in the country of domicile/incorporation of the FII.
6) SEBI's initial registration would be valid for five years. RBI's
general permission under FERA to the FII would also hold good for
five years. Both would be renewable for similar five year periods
later on.
7) RBI's general permission under FERA would enable the registered
FII to buy, sell and realize capital gains on investments made
through initial corpus remitted to India, subscribe/renounce rights
offerings of shares, invest on all recognized stock exchanges
through a designated bank branch, and to appoint a domestic
Custodian for custody of investments held.
8) This General Permission from RBI would also enable the FII to: a.
Open foreign currency denominated accounts in a designated bank.
(There could even be more than one account in the same bank
branch each designated in different foreign currencies, if it is so
required by FII for its operational purposes);
b. Open a special non-resident rupee account to which could be
credited all receipts from the capital inflows, sale proceeds of
shares, dividends and interests;
c. Transfer sums from the foreign currency accounts to the rupee
account and vice versa, at the market rate of exchange;
d. Make investments in the securities in India out of the balances in
the rupee account;
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e. Transfer repairable (after tax) proceeds from the rupee account to


the foreign currency account(s);
f. Repatriate the capital, capital gains, dividends, incomes received
by way of interest, etc. And any compensation received towards
sale/renouncement of rights offerings of shares subject to the
designated branch of a bank/the custodian being authorized to
deduct withholding tax on capital gains and arranging to pay such
tax and remitting the net proceeds at market rates of exchange;
g. Register FII's holdings without any further clearance under FERA.
9) There would be no restriction on the volume of investment
minimum or maximum-for the purpose of entry of FIIs, in the
primary/secondary market. Also, there would be no lock-in period
prescribed for the purposes of such investments made by FIIs. It was
expected that the differential in the rates of taxation of the long
term capital gains and short term capital gains would automatically
induce the FIIs to retain their investments as long term investments.
10) Portfolio investments in primary or secondary markets were
subject to a ceiling of 30% of issued share capital for the total
holdings of all registered FIIs, in any one company. The ceiling was
made applicable to all holdings taking into account the conversions
out of the fully and partly convertible debentures issued by the
company. The holding of a single FII in any company would also be
subject to a ceiling of 10% of total issued capital. For this purpose,
the holdings of an FII group would be counted as holdings of a single
FII.
11) The maximum holdings of 24% for all non-resident portfolio
investments, including those of the registered FIIs, were to include
NRI corporate and non-corporate investments, but did not include
the following:
a. Foreign investments under financial collaborations (direct foreign
investments), which are permitted up to 51% in all priority areas.
b. Investments by FIIs through the following alternative routes:
i. Offshore single/regional funds;
ii. Global Depository Receipts;
iii. Euro convertibles.
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12) Disinvestment would be allowed only through stock exchange in


India, including the OTC Exchange. In exceptional cases, SEBI may
permit sales other than through stock exchanges, provided the sale
price is not significantly different from the stock market quotations,
where available.
13) All secondary market operations would be only through the
recognized intermediaries on the Indian Stock Exchange, including
OTC Exchange of India. A registered FII would be expected not to
engage in any short selling in securities and to take delivery of
purchased and give delivery of sold securities.
14)A registered FII can appoint as Custodian an agency approved by
SEBI to act as custodian of Securities and for confirmation of
transactions in Securities, settlement of purchase and sale, and for
information reporting. Such custodian should establish separate
accounts for detailing on a daily basis the investment capital
utilization and securities held by each FII for which it is acting as
custodian. The custodian was supposing to report to the RBI and
SEBI semi-annually as part of its disclosure and reporting guidelines.
15) The RBI should make available to the designated bank branches
a list of companies where no investment will be allowed on the basis
of the upper prescribed ceiling of 30% having been reached under
the portfolio investment scheme.
16) Reserve Bank of India may at any time request by an order a
registered FII to submit information regarding the records of
utilization of the inward remittances of investment capital and the
statement of securities transactions. Reserve Bank of India and/or
SEBI may also at any time conduct a direct inspection of the records
and accounting books of a registered FII.
17) FIIs investing under this scheme will benefit from a concessional
tax regime of a flat rate tax of 20% on dividend and interest income
and a tax rate of 10% on long term (one year or more) capital gains.
These guidelines were suitably incorporated under the SEBI (FIIs)
Regulations, 1995. These regulations continue to maintain the link
with the government guidelines through an inserted clause that the
investment by FIIs should also be subject to Government guidelines.
This linkage has allowed the Government to indicate various
investment limits including in specific sectors.

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Market design in India for foreign institutional investors Foreign


Institutional Investors means an institution established or
incorporated outside India which proposes to make investment in
India in securities. A Working Group for Streamlining of the
Procedures relating to FIIs, constituted in April, 2003, inter alia,
recommended streamlining of SEBI registration procedure, and
suggested that dual approval process of SEBI and RBI be changed to
a single approval process of SEBI. This recommendation was
implemented in December 2003.
Currently, entities eligible to invest under the FII route are as
follows:
i) As FII: Overseas pension funds, mutual funds, investment trust,
asset management company, nominee company, bank, institutional
portfolio manager, university funds, endowments, foundations,
charitable trusts, charitable societies, a trustee or power of attorney
holder incorporated or established outside India proposing to make
proprietary investments or with no single investor holding more than
10 per cent of the shares or units of the fund).
(ii) As Sub-accounts: The sub account is generally the underlying
fund on whose behalf the FII invests. The following entities are
eligible to be registered as sub-accounts, viz. partnership firms,
private company, public company, pension fund, investment trust,
and individuals. FIIs registered with SEBI fall under the following
categories:
a) Regular FIIs- those who are required to invest not less than 70 %
of their investment in equity-related instruments and 30 % in nonequity instruments.
b) 100 % debt-fund FIIs- those who are permitted to invest only in
debt instruments. The Government guidelines for FII of 1992
allowed, inter-alia, entities such as asset management companies,
nominee
companies
and
incorporated/institutional
portfolio
managers or their power of attorney holders (providing discretionary
and non-discretionary portfolio management services) to be
registered as FIIs. While the guidelines did not have a specific
provision regarding clients, in the application form the details of
clients on whose behalf investments were being made were sought.

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While granting registration to the FII, permission was also granted


for making investments in the names of such clients. Asset
management companies/portfolio managers are basically in the
business of managing funds and investing them on behalf of their
funds/clients. Hence, the intention of the guidelines was to allow
these categories of investors to invest funds in India on behalf of
their 'clients'. These 'clients' later came to be known as subaccounts. The broad strategy consisted of having a wide variety of
clients, including individuals, intermediated through institutional
investors, who would be registered as FIIs in India. FIIs are eligible to
purchase shares and convertible debentures issued by Indian
companies under the Portfolio Investment Scheme.

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The underlying rationale of all such analytical exercises to capture


the overall impact of FDI inflows has been the basic understanding
that because foreign investors often maintain tight control over
operations of affiliated companies given the ownership advantages
linked to their proprietary assets and lasting interest, the impact
and implications of FDI for the development of host economies are
very different from those of foreign portfolio capital inflows that are
pure financial investments seeking capital gains. It is worth recalling
that it is based on this distinction between FDI and foreign portfolio
investment that developing countries have been encouraged (and
often, compelled) to promote FDI through various investment
incentives and liberalisation of their FDI policies since the early
1980s. Given that the key differentiating characteristic of FDI is the
foreign direct investors necessity to maintain control, despite the
existence of differing view points on the threshold of equity share to
be considered as a controlling share, what has been internationally
recognised as FDI has been the OECD Benchmark
Foreign direct investment reflects the objective of establishing a
lasting interest by a resident enterprise in one economy (direct
investor) in an enterprise (direct investment enterprise) that is
resident in an economy other than that of the direct investor The
direct or indirect ownership of 10% or more of the voting power of
an enterprise resident in one economy by an investor resident in
another economy is evidence of such a relationship.
It is clear that the central aspect of the operational FDI definition is
lasting interest to be captured through a foreign investors
ownership of minimum 10 per cent voting power in the invested
company. As the OECD definition explains, the lasting interest
implies the existence of a long-term relationship between the direct
investor and the direct invested enterprise and a significant degree
of influence on the management of the enterprise. Evidently, this is
how the foreign direct investor can maintain his ownership
advantages over his proprietary assets.
Given that it is not possible to do detailed industry and firm-level
studies at all times, the most immediate measure of the contribution
of FDI in a host country is given by the absolute amount of recorded
FDI inflows. In this context it came to be recognised that direct
investment is not solely limited to equity investment (to be captured
by a minimum 10% equity share) but also relates to reinvested

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earnings and inter-company debt. In the context of many countries,


the concern has been that the ratios of FDI inflows to total capital
inflows as well as those to gross domestic investment tend to
understate the financial importance of FDI for a host economy,
because recorded FDI flows do not capture even the complete
financial contribution of foreign affiliates in many countries. This was
true for several developed and developing countries like India,
Thailand, etc., which did not include either reinvested earnings or
inter-company debt or both in the reported FDI data until a few
years ago.
But, given that we now live in a different world of proliferating Free
Trade Agreements (FTAs) and Bilateral Investment Treaties (BITs)
involving investment liberalisation that make privileges and
treatment accorded to foreign direct investors legally binding, it
may be important to recognise that beyond the concerns of being
able to capture the real financial and economic contribution of FDI
inflows, developing country governments promoting FDI need to be
aware that FDI definitions are also about protecting the rights of
the so-defined investors in the host country.

4.2 COMPARISON OF FDI & FII


Below table presents the amount of flow of FDI and FII in India in
terms of US$ million. The flow of FDIs has shown an increasing trend
during the considered period except during the years i.e. 2001 to
2004 and the year 2010-11. The flow of FII has shown a mixed
trend, during the year 2008-09 there was a negative flow of FII.
When flow of FII and FDI are compared, the flow of FII is less than
flow of FDI in to India except for three years i.e. from 2003 to 2006

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4.3 FDI & ECONOMIC GROWTH


The IMF definition of FDI includes as many as twelve different
elements-equity capital, reinvested earnings of foreign companies,
inter company debt transactions, shortterm and long-term loans,
financial leasing, trade credits, grants, bonds, non-cash acquisition
of equity, investment made by foreign venture capital investors,
earnings data of indirectly-held FDI enterprises, control premium
and non-competition fee. India, however, does not adopt any other
element other than equity capital reported on the basis of issue or
transfer of equity or preference shares to foreign direct investors.
Below figure exploring the process how FDI is important in utilizing
of our economic resources and generating the employment in
country as well as important for creating economic prosperity.

FDI AND INDIA SERVICE SECTOR


The sector wise shift of FDI in last two decade have shown a
dramatically change. For comparison, this study divide the period
from August 1991 to March 2009 into two decade first from 1991 to
2000 and second 2000 to 2009(figure 02 & 02).During the first
decade of reforms started from August 1991 to December 1999,
services sector on Indian economy was unable ton attracted the
attentions of foreign investor and old third place after the
transportation and electrical equipment, but second decade started
from January 2000 to March 2009,the emergence of the service
sector have change the composition of foreign direct investment in

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India. In the second decade of economic reforms this sector account


27 percent of total FDI and hold first rank in attractive sector for
foreign investor. This is due to the growth of sub sectors like IT,
Financial Services, Insurance sector extra. There is a new wave in
the growth of India financial sector after liberalization insurance
industry growing with rapid rate. The number of merger and
acquisition in the insurance industry as well as in banking sector
also, number of private banks are growing in India. The performance
of foreign banks is quit well. Government of India planning for issue
some new license for privatization of Indian banking sector and it is
assumed the sector will continue with sector growth.

4.3 CURRENT
AREAS

CHALLENGES

AND

IMPROVEMENT

As explained above, India is definitely a lucrative place for FDI,


there are certainly some challenges and areas for improvement
present. Until, these areas are honed to perfection, India will
become the number one place for FDI. Some of the key areas
listed below :

but
still
not
are

a)
Political risk: Amongst the top items is the political instability
of the country. On one hand the fact that India is the worlds largest
democracy does add a sense of pride and security, but the hard
reality is that there is insurmountable instability present. Just the
fact that the past two governments have been based on coalitions
between a few parties is reason enough to be skeptical. Moreover,
each new government has certain policies which are different from
the ruling government and if there is frequent change in
government, this will lead to changes in policy and increased
uncertainty. Just take the example of the last elections in 2004,
where by a sudden change of event the Indian National Congress
was able to come into power by forming a coalition government, by
soliciting the vast majority of the poor people of the country,
surprising the incumbent government which was relying heavily on
a fast growing economy, increased privatization and a thriving
middle class.
b)
Bureaucracy:
Another very important factor that affects
Indias competitiveness on the world standing is the Bureaucracy.

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Particularly in the FDI process the Indian Government has already


invested a lot of time and effort but there is still a lot of room for
improvement in the identification, approval and implementation
process e.g. creating more centres for assistance, more user friendly
processes, effective use of technology, being as clear as possible
leaving no room for interpretation, assisting in identifying new areas
for investment etc.
c)
Security risk: Another important factor that needs to be
handled with care and worked upon is the ever present security risk.
This risk includes the geopolitical risk with Pakistan and the ongoing
dispute over the Kashmir issue, which on numerous occasions has
brought these two countries armed with

nuclear weapons to the brink of war. The other security risks would
include incidences of domestic terrorism, not only in the Kashmir
valley but also in Assam, Manipur and Nagaland, where numerous
separatists group operate.
d)
Cost advantage: One of the attractions of India is the lower
cost advantage as compared to most western economies. The Indian
Government would have to work on creating an atmosphere where
this advantage can be maintained else it might result in India not
seem as attractive. One of the key drivers would be to try and
control inflation because if there is increased level of inflation then
there would be increased costs and reduced returns. Other factors
which would act in similar respects would be increased tax
incentives and reduced tariffs.
e)
Intellectual Property (IP) Rights & Piracy: With the increased
instances of Piracy around the world and the extreme importance
placed by Investors on maintaining their IP rights, this is definitely
an area which needs improvement in India. India has begun instilling
intellectual property rules and regulations into the country but there
is still a long road ahead. The main area for improvement in this

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respect is the enforcement, which is the most crucial part but the
weakest at present in the country. The enforcement of IP rights
included the increased crackdown in the market on pirated and
knock-downed good.
f)
Privatization and deregulation: Increased privatization of
various sectors would definitely enhance the attractiveness of India
as an FDI destination. India has already taken steps to privatize
areas such as electricity, telecommunication etc. and increase the
foreign holding capacity in sectors such as banking and insurance
which is a first step.
g)
Infrastructure: It definitely is an added bonus to the investor if
there is adequate infrastructure present in the country. In India there
is substantial lack of robust infrastructure around the country, e.g.
proper roads, highways, adequate supply of clean water,
uninterruptible supply of electricity etc. But there is a flipside to this
lack of Infrastructure. Quoting the prime minister Dr. Manmohan
Singh on a recent speech at the NYSE ,
When I talk to business people, they tell me, Well, Indias
infrastructure is a problem. I do agree with them that infrastructure
is our biggest problem and also the biggest opportunity. In the next
10 years we must invest at least $150 billion to modernize and to
expand Indias infrastructure, and we have major investments
needed in energy sector, in power sector, in oil exploration, in roads
programme, in modernizing our railway system, food system,
airports. This is where, I feel, we need a new experimentation with
public-private sector participation because the public sector may
have a role, but by itself it cannot meet all the requirements. As I
see an expanding and very profitable role of foreign direct
investment in meeting the challenge of modernizing Indias
infrastructure.
So the lack of infrastructure can definitely be seen as a blessing in
disguise and be a substantial source of FDI, but nevertheless if this
FDI does not materialize, the Government will have to invest their
own funds into it and try and attract other investments.

4.4 FDI IN INDIA SECTOR WISE

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Liberalization of the policy in Single- Brand Retail Trading.


Present Position: Foreign Direct Investment (FDI), in retail trade, is
prohibited except in single brand product retail trading, in which FDI,
up to 51% is permitted.
Revised Position: The Government of India has reviewed the extant
policy on FDI and decided that FDI, upto 100%, under the
government approval route, would be permitted in Single-Brand
Product Retail Trading.
FDI in Hotel & Tourism sector in India: 100% FDI is permissible in the
sector on the automatic route. The term hotels include restaurants,
beach
resorts,
and
other
tourist
complexes
providing
accommodation and/or catering and food facilities to tourists.
Tourism related industry include travel agencies, tour operating
agencies and tourist transport operating agencies, units providing
facilities for cultural, adventure and wild life experience to tourists,
surface, air and water transport facilities to tourists, leisure,
entertainment, amusement, sports, and health units for tourists and
Convention/Seminar units and organizations.
Non-Banking Financial Companies (NBFC): 49% FDI is allowed from
all sources on the automatic route subject to guidelines issued from
RBI from time to time.
FDI in Insurance sector in India: FDI up to 26% in the Insurance
sector is allowed on the automatic route subject to obtaining licence
from Insurance Regulatory & Development Authority (IRDA)
FDI in Telecommunication sector: In basic, cellular, value added
services and global mobile personal communications by satellite,
FDI is limited to 49% subject to licensing and security requirements
and adherence by the companies (who are investing and the
companies in which investment is being made) to the license
conditions for foreign equity cap and lock- in period for transfer and
addition of equity and other license provisions.
a) ISPs with gateways, radio-paging and end-to-end bandwidth, FDI
is permitted up to 74% with FDI, beyond 49% requiring Government
approval. These services would be subject to licensing and security
requirements.
b) No equity cap is applicable to manufacturing activities.

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c) FDI up to 100% is allowed for the following activities in the


telecom sector :
FDI in Trading Companies in India
Trading is permitted under automatic route with FDI up to 51%
provided it is primarily export activities, and the undertaking is an
export house/trading house/super trading house/star trading house.
However, under the FIPB route:100% FDI is permitted in case of trading companies for the following
activities:

Exports;
bulk imports with ex-port/ex-bonded warehouse sales;
cash and carry wholesale trading;
Other import of goods or services provided at least 75% is for
procurement and sale of goods and services among the
companies of the same group and not for third party use or
onward transfer/distribution/sales.

FDI in Power Sector in India: Up to 100% FDI allowed in respect of


projects relating to electricity generation, transmission and
distribution, other than atomic reactor power plants. There is no
limit on the project cost and quantum of foreign direct investment.
Drugs & Pharmaceuticals :FDI up to 100% is permitted on the
automatic route for manufacture of drugs and pharmaceutical,
provided the activity does not attract compulsory licensing or
involve use of recombinant DNA technology, and specific cell / tissue
targeted formulations.
Roads, Highways, Ports : FDI up to 100% under automatic route is
permitted in projects for construction and maintenance of roads,
highways, vehicular bridges, toll roads, vehicular tunnels, ports.
Pollution Control and Management : FDI up to 100% in both
manufacture of pollution control equipment and consultancy for
integration of pollution control systems is permitted on the
automatic route.
Call Centers in India : FDI up to 100% is allowed subject to certain
conditions.

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Business Process Outsourcing in India: FDI up to 100% is allowed


subject to certain conditions.
Foreign Direct Investment in Small Scale Industries (SSI's) in India
:Recently, India has allowed Foreign Direct Investment up to 100%
in many manufacturing industries which were designated as Small
Scale Industries.

4.5 ADVANTAGES OF FDI IN INDIA


Huge Market Size and a Fast Developing Economy
India is the second largest country in the world just behind China in
terms of population. Currently the total population is about 1.2
billion. This huge population base automatically makes a huge
market for the business operators to capture and also a major part
of it is still can be considered as un-served or not yet been
penetrated.
Therefore FDI investors automatically get a huge market to capture
and also ample opportunity to generate cash inflows at relatively
quicker times. The economy of India is also moving at faster pace
than most of the economy of the world and inhabitants of the
country also obtaining purchasing power at the same rate (Athreye
& Kapur, 2001; World Bank, 2004)
Availability of Diversified Resources and Cheap Labour Force
The huge advantage every company gets by investing in India is the
availability of diversified resources. It is a country where different
kinds of materials and technological resources are available. India is
a huge country and has forest as well as mining and oil reserve as
well. These are also coupled with availability of very cheap labour
forces at almost every parts of the country. From Mumbai which is in
the west to Bengal which is in the east there is ample opportunity to
set up business venture and location and most importantly labour is
available at low cost (Bhandari & Tandon, 2002).

Increasing Improvement of Infrastructure

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A lot of research study in India finds out that historically the country
fails to attract a significant amount of FDI mainly because of
problems in infrastructure. But the scenario is changing. The Indian
government has taken huge projects in transportation and energy
sectors to improve the case. The projects for developing road
transport is worth of $90 billion, for rail it has undertaken several
projects each worth of $20 million and for ports and airports the
value of development projects is around $ 80 billion. In addition the
investment in energy development is worth of $ 167 billion and
investment in nuclear energy development is outside that
calculation. These huge investments are changing the investment
climate in the country and investors will benefit hugely by that
(Department of Industrial Policy and Promotion, 2005; Dua &
Rasheed, 1998).
Public Private Partnerships
Another significant advantage foreign investors experience in India
today is the opportunities of PPP or Public private Partnership in
different important sectors like energy, transportation, mining, oil
industry etc. It is advantageous in several ways as it has eliminated
the traditional tirade barriers and also joint venture with
government is risk free up to the great extent (GOI, 2007; IMF,
2005; Nagaraj, 2003).

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IT Revolution and English Literacy


Today the modern India considered to be one of the global leaders in
IT. India has developed its IT sectors immensely in last few years
and as of today many leading firms outsource their IT tasks in India.
Because of IT advancement the firm which will invest in India will
get cheap information access and IT capabilities as Indian firms are
global leader. Along with that Indian youth are energetic and very
capable in English language which is obligatory in modern business
conduction. This capability gives India an edge over others. Foreign
firms also find it profitable and worthy investment by recruiting
Indian HR (GOI, 2006; GOI, 2007; IMF, 2005; Lall, 2002).
Openness towards FDI
Recently the Government of India has liberalized their policies in
certain sectors, like Increase in the FDI limits in different sectors and
also made the approval system far easier and accessible. Unlike the
historical tradition, today for investing in India government approval
do not require in the special cases of investing in various important
sectors like energy, transportation, telecommunications etc
(Economic Department, 2005; GOI, 2007; Nagaraj, 2003).
Regulatory Framework and Investment Protection
In the process of accelerating FDI in the country the government of
India has make the regulatory framework lot more flexible. Now a
days foreign investors get different advantages of tax holiday, tax
exemptions, exemption of service and central taxes. The
government also opened few special economic zones and investors
of those zones also get a lot of befits by investing money. Apart from
that there are number of laws has been passed and executed for
making the investments safe and secure for the foreign investors
(IMF, 2005; Nagaraj, 2003; Planning Commission of India, 2002;
World Bank, 2004).

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FDI Inflow Monthwise 2012 - 13


30000
25000
20000

FDI Inflow Monthwise 2012


- 13

15000
10000
5000
0

41030
41091
41153
41214
41000
41061
41122
41183
41244

50000
45000
40000
35000
30000
25000

2010 - 11

20000

2011 - 12

15000

2012 - 13

10000
5000
0

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CHAPTER 6
Data Analysis & Interpretation

Q1) Do you have Insurance?

Yes

No

ANSWER:As per the survey made it is concluded that 9 out of 10 people have
insurance. People having insurance take it as their security against
any unwanted happening or a catastrophe. The rest who do not
have an insurance consider that insurance many a times doesnt
help in critical situations. As they have to run behind fulfilment of
formalities to get their money which is very tiring for them.

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Q2) From which company you have


taken insurance?

Prefernce of Insurance company

10%
LIC

Others

90%

ANSWER:LIC being a very renowned and a trustworthy insurance company


people prefer to take insurance policies from LIC rather than from
any other private companies. Hence from the above diagram it can
be seen that 90% people prefer LIC as their company to be trusted
on for any kind of policy. LIC is much faster in settling claims and
paying back their customers money to them when they require it.

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Q3) Which policy you have?

Mediclaim

Term Insurance

Endowment

ANSWER:-

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On a graph of 1 to 10 Mediclaim is the highest selling policy.


Mediclaim is the most useful policy to all. As health of any person
never remains constant and healthy in such a case only a mediclaim
can be a used as a helping hand. It is highly preferred by all. Then
comes the term Insurance. In this the policy holder gets the money
only when the policy holder dies a natural or an accidental death.
The nominee gets the policy money. Least preferred is the
Endowment policy and Money back policy. In this the poilcy holder
gets the sum assured and the bonus on sum insured.

Q4) Is insurance necessary for every


person? If yes, then why? If No, then
why?
ANSWER:-

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YE
N
S
O
Q5) Have you heard about FDI?

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People knowing about FDI

Yes
No

ANSWER:As per the survey maximum of the people know about FDI and have
a good knowledge about it. Whereas few people do not know about
it as they do not take insurance and are in no ways connected to the
insurance industry. So it can be concluded that all the people should
be given proper knowledge that what FDI is all about. How it works
and what are its benefits.

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Q8) Is it necessary to allow FDI in


insurance?

100%
90%
80%
70%
60%

Column1
Column2

50%
40%
30%
20%
10%
0%

Yes

No

ANSWER:Yes, FDI should be included in the insurance sector. As if FDI will be


allowed then the insurance premiums will get affected. If FDI is
allowed in this industry than there are chances of the services
getting better. Through this the customers will be benefitted at
large. So the people in favour of FDI support of FDI see many
benefits of FDI and vice versa.

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Q9) How much


insurance?

big bang of fdi in insurance

FDI

is

allowed

in

4
2
6
9
%
ANSWER:Maximum of the people said that 49 % FDI is now allowed in the
insurance sector as they were aware of the latest reforms made in
the insurance sector whereas the rest of the people said that only
26% FDI is allowed which is the old reform that was made. Hence
from this we can conclude that the population in our country is not
well aware about the reforms made in Insurance sector.

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Q10) Will FDI impact on the insurance


premium?

N
Y
O
E
S
ANSWER:-

In this question the people who answered the questionnaire were a


bit confused whether it will affect or not. But it was then concluded
that yes, FDI will surely impact on the insurance premium. As FDI
will come the premiums to be paid will get reduced. Whereas the
people who did ot agree contradicted to it.

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CHAPTER 7
Suggestions And Conclusion
It can be observed from the above analysis that at the sectoral level
of the Indian economy, FDI has helped to raise the output,
productivity and employment in some sectors especially in service
sector. Banking and insurance sector help in providing the strength
to the Indian economic condition and develop the foreign exchange
system in country. So, we can conclude that FDI is always helps to
create employment in the country. According to the projections of
IRDA, the life insurance industry will need capital of at least 40,000
crore to ensure that the industry grows enough to be 8% of GDP.
Indias cabinet approved a 49% FDI in insurance on Thursday (4 th
October 2012) & opened up the pension sector to foreign capital
investment, providing the much needed momentum to the Indian
economy. In the second round of economic reforms the government
cleared amendments to raise the FDI cap in the insurance sector to
49% from the existing 26% while it approved a 26% FDI in pension
sector.
FDI in the insurance sector is allowed under the automatic route
subject to the condition that the companies bringing in FDI obtain
the necessary license from IRDA for undertaking insurance
activities.
The process of economic reforms which was initiated in July 1991 to
liberalize and globalize the economy had gradually opened up many
sectors of its economy for the foreign investors. A large number of
changes that were introduced in the countrys regulatory economic
policies heralded the liberalization era of the FDI policy regime in
India and brought about a structural breakthrough in the volume of
the FDI inflows into the economy maintained a fluctuating and
unsteady trend during the study period. It might be of interest to
note that more than 50% of the total FDI inflows received by India
during the period from 1991-2007 came from Mauritius and the USA.

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In this hyper competitive and ever changing business environment


no business organization is certain about tomorrow. That forces
them to look for new destination and new market to capture. The
emerging market of China and India without any doubt poses
suitable choice for those companies. Huge population and huge
countryside is certainly making those places even more attractive.
There are several benefits in investing in those two countries likevery bright future, cheap labour and raw materials, sound
infrastructure, huge market availability.

APPENDIX 1
Questionnaire
Name of
person:____________________________________________
_______
Contact number:- _________________________________
Email Id: ___________________________________
Date:____/____/_______

1. Do you have insurance?


Yes

No

2. From which insurance company you have taken


insurance?
LIC
Others
3. Which type of policy you have?
Ans:____________________________________________________
__________________

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________________________________________________________
_____________
4. Is Insurance necessary for every person?
Yes

No

5. If yes, then why is it necessary?


______________________________________________________
____________________________________________
6. If no, then why not necessary?
______________________________________________________
____________________________________________

7. Have you heard about FDI?


Yes

No

8. According to you what is FDI?


_________________________________________________
_________________________________________________
9. Is it necessary to allow FDI in insurance?
Yes

No

10. How much FDI is allowed in insurance?


26%
50%
46%
49%
11. Will FDI impact on insurance premium?
Yes

No

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Signature

_______________________
_

APPENDIX 2
Bibliography
Internet Bibliography
Links:www.bis.org
www.livemint.com
www.policymantra.com
www.timesofindia.com
www.wikipedia.org
www.scribd.com
www.businesstoday.in

Books, Journals, Newspaper & Other


Reference:Economic times
Times of India

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CFP( Certified Financial Planner) Text Book


CS Text books
Other References

Friends
College Professors
Family relatives
Friends & relatives employed in insurance sector.

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