The government appears to have buckled under political pressure, as the finance ministry is set to take a diluted version of the Insurance Bill to the Cabinet in the coming week.

The revised Insurance Laws (Amendment) Bill proposes to retain the foreign direct investment (FDI) cap in the sector at 26 per cent, against 49 per cent proposed earlier. This comes barely two weeks after the Cabinet cleared a toned-down version of the Banking Laws (Amendment) Bill.

A higher FDI cap in insurance was expected to give a push to financial sector reforms that Finance Minister Pranab Mukherjee had been talking about. But, a foreign investment ceiling status quo will take much of the sting out of the legislation, particularly at a time when the country desperately needs foreign inflows in the wake of a widening current account deficit and a weakening rupee.

THE PROPOSALS

Bill says retain FDI cap at 26%, against 49% planned originally

Parliamentary panel said hike not in the sector's interest

Sector to be opened to branch operations by foreign re-insurers

Insurance regulator to come up with guidelines on such branches

The Bill will make some incremental changes to fine-tune the existing legislation. The ministry has broadly followed the recommendations of Parliament's standing committee on finance headed by BJP leader Yashwant Sinha. The panel had said instead of seeking foreign capital, companies should tap the domestic market to meet their needs.

The Bill proposes opening up the sector for branch office operations by foreign re-insurers "on terms and conditions of the standing committee". It also proposes to increase the time period beyond which a policy cannot be questioned on ground of misstatement from two to five years.

"Consumer policy protection remains the prime focus of the Bill. It will be easier to increase insurance penetration in the country... Allowing branches of foreign re-insurers would reduce the exposure of Indian re-insurer (GIC)," an official said in defence of the new version.

Under attack from various quarters for not being able to push reforms, the government recently started moving ahead on key financial sector Bills, stalled for years. The movement, however, has come at the cost of dilutions in some of their key proposals. Last month, the Banking Bill met a similar fate when the Cabinet approved a proposal to raise the cap on shareholders' voting rights in private banks from 10 per cent at present to 26 per cent, irrespective of their total holding. The original plan was to raise rights in proportion to an entity's shareholding.

"An understanding has been arrived at between the government and the Opposition that if the standing committee's recommendations are accepted, the Bills would be allowed to sail through smoothly in Parliament," a senior government functionary told Business Standard.

The government had also conceded to the standing committee's suggestion to fix a 26 per cent FDI ceiling in the Pension Fund Regulatory and Development Authority Bill, but it did not pass muster with Trinamool Congress supremo Mamata Banerjee. The Bill has been pending with the Cabinet since December 2011. The proposals may be diluted further, to Banerjee's satisfaction.

Other Bills such as the Constitution amendment for the Goods & Services Tax and the Direct Taxes Code may also be tweaked so that they can see the light of day before the elections in 2014. Similarly, the decision on allowing up to 51 per cent FDI in multi-brand retail may be altered.