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June, 11th 2010

India's biggest life insurer, Life Insurance Corporation of India (LIC), has assets under management of around Rs 10 lakh crore, but has a paid-up capital of Rs 5 crore. This is absurd. The private insurers are required to have a minimum of Rs 100 crore as capital, and to keep raising it as their business volumes go up. But the 54-year-old big daddy of them all, which still accounts for nearly two thirds of the new business premium, makes do with small change for its capital.

The fault is not the corporation's, of course. The stunted capital is a result of the law under which LIC was created. And the move to change the law has been stymied by the decision to tag it on to the bill to enhance the limit on foreign direct investment in insurance from 26 percent to 49 percent.

The proposal to increase FDI in insurance is jinxed due to opposition from various political parties, particularly the Left, and the opportunistic nature of Indian politicians who oppose or support laws on the basis of expedience rather than of principle.

While raising FDI limits in insurance raises political hackles, the government would not encounter such hurdles on changing the capital structure of LIC. The changes in the LIC Act should, therefore, be delinked from the amendments to the Insurance Act. The government should independently alter the capital structure of LIC.

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