By Sumeet Chatterjee and Devidutta Tripathy
MUMBAI, July 10 (Reuters) - India's new government plans to nearly double the proportion of foreign investment allowed in the $60 billion insurance business to 49 percent, a potential lifeline for a sector starved of capital and squeezed by regulations.
The proposal, which requires the approval of both houses of parliament, would bring foreign investment worth up to $2 billion into the sector within a year of its implementation, industry officials estimated on Thursday.
Finance Minister Arun Jaitley said in his maiden budget speech that the "composite cap" in the insurance sector should be increased to 49 per cent from the current level of 26 per cent, with full Indian management and control.
"The insurance sector is investment starved. Several segments of the insurance sector need an expansion," he said.
While industry executives sought clarity on whether the composite cap meant foreigners would be allowed to own up to 49 percent through foreign direct investment and foreign portfolio investment, they welcomed the long-pending move.
"It will attract more investors. There are some strategic investors who are very clear about owning 49 percent at least," said Amitabh Chaudhry, CEO of HDFC Life, a joint venture between Indian mortgage lender Housing Development Finance Corp Ltd and Britain's Standard Life.
"The fact that the government within six weeks of coming to power has made it clear that that's what they intend to do is a good sign," he said, adding Standard Life will look at raising its stake from 26 percent in the joint venture.
Other foreign insurers including Canada's Sun Life Financial Inc, Prudential Plc, Nippon Life Insurance Co, Italy's Generali and Dutch insurer Aegon NV operate in India through joint ventures with local companies.
India's insurance business was full of promise when it was thrown open to competition in 2000, but has been hobbled by losses, regulatory change, uncertainty and a sharp slowdown in the economy.
The federal government's approval for a proposal to raise the limit to 49 percent has been kept pending for a long time due to opposition by nationalist politicians, frustrating many overseas investors lured by low penetration rates in India.
Life insurance penetration in India is about 3.2 percent of gross domestic product in terms of total premiums underwritten in a year, much lower than more than 10 percent in Japan and nearly 6 percent in Australia.
Dutch banking and insurance group ING Groep NV and New York Life have quit their Indian ventures in recent years, while some other foreign investors were said to be weighing their options.
At the end of Sept 2013, India had 24 life insurers, which accounts for 80 percent of the sector's business. Only 17 of the 24 reported profits in the fiscal year ended March 2013, according to latest data available with the regulator.
State-owned Life Insurance Corp of India Ltd controls about 70 percent of the life insurance business.
"This measure should provide impetus for spurring growth of the insurance industry and enable foreign players to bring in capital required for growing distribution (and) product suite," said Shashwat Sharma, partner at consultant KPMG.
(Editing by Douglas Busvine/Ruth Pitchford)