Highly placed sources said the government was considering an increase in the foreign investment limit in the insurance sector from the present 26 per cent to 49 per cent.

This is in line with the recommendation of the Insurance Regulatory and Development Authority, which had supported the industry's demand for increasing the limit to help raise additional capital.

The sources said an increase in the foreign investment limit, however, required an amendment to the Insurance Act. "Unlike other sectors, where an increase in foreign direct investment can be effected through a notification, the 26 per cent cap in the insurance sector has been specified in the Insurance Act itself," explained a source.

Till September 2003, the entry of foreign partners in insurance joint ventures in India has resulted in the sector attracting FDI to the tune of Rs 825.44 crore (Rs 8.25 billion). The paid-up capital of the 27 players in the sector on March 31, 2003 was Rs 4,172.13 crore (Rs 41.72 billion), according to IRDA annual report for 2002-03.

IRDA sources said during the last four years, companies had expended their capital and required infusion of funds to meet the capital adequacy norms stipulated by the insurance regulator.

Against a minimum authorised capital of Rs 100 crore (Rs 1 billion), at least four of the dozen life insurance companies have more than doubled their capital.

While ICICI Prudential has increased its capital nine times since its inception in December 2000 to Rs 625 crore (Rs 6.25 billion) now, Max New York Life has more than tripled it to Rs 346 crore (Rs 3.46 billion), HDFC Standard Life to Rs 218 crore (Rs 2.18 billion) and Birla Sun Life to Rs 230 crore (Rs 2.3 billion). Even ING Vysya and SBI Life have raised their capital to Rs 140 crore (Rs 1.45 billion) and Rs 175 crore (Rs 1.75 billion), respectively.

The sources said in some cases, Indian partners, which hold 74 per cent stake in the insurance ventures, were not able to infuse additional capital commensurate to their stake. "Overseas partners, with deep pockets, were ready to pick up the tab, but the 26 per cent cap on holding restricted them in bringing in the required funds," a source said.

The previous National Democratic Alliance government too had planned to re-write the entire Insurance Act which besides looking at the foreign investment limit also proposed to liberalise the overseas investment norms for insurance companies.

The sources said Chidambaram was likely to announce his intention to further open up the sector on July 8.

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