The government may retain foreign direct investment in the insurance sector to existing 26 per cent as recommended by Standing Committee on Finance.

The issue of foreign investment in insurance sector is on the agenda of the Cabinet, which will meet tomorrow, sources said.

As per the current regulation, a foreign player cannot have more than 26 per cent stake in private insurance companies in the country.

The Standing Committee had rejected the government's proposal to raise foreign direct investment ceiling to 49 per cent in December last year.

The committee in its report on the Insurance Laws (Amendment) Bill, 2008, had said the proposal to increase the FDI cap to 49 per cent in insurance companies seems to have been decided upon "without any sound and objective analysis of the status of the insurance sector following liberalisation".

It had said that the policy stance of enabling a greater role for foreign capital in the insurance sector would not necessarily have the desired impact.

"Increased role of foreign capital may lead to the possibility of exposing the economy to the vulnerabilities of the global market,...flight of capital outside the country and also endangering the interest of the policy holders," it had said.

However, the panel, headed by senior BJP leader Yashwant Sinha, had agreed on the need to bring in comprehensive changes in the archaic laws governing the insurance sector.

Foreign insurers and their domestic partners have been demanding an increase in the FDI cap to 49 per cent to fund business expansion.

The government had introduced the Insurance Bill in the Rajya Sabha in December 2008 with an aim to bring improvement and revision of laws relating to insurance business in the changed scenario of private participation.