Budget 2025: Insurance Stocks Plunge Although FDI Limit Increased

Finance Minister Nirmala Sitharaman, in her Budget 2025 speech, announced an increase in the foreign direct investment (FDI) limit for the insurance sector from 74% to 100%. The change applies to insurers that reinvest the entire premium collected within India. The government aims to attract more foreign capital and increase insurance penetration in the country.

Immediate Market Impact

Shares of major Indian insurance companies like HDFC Life, SBI Life, and ICICI Prudential Life saw sharp declines of up to 6% today, on Saturday, February 1, despite an initial rally. The stocks had gained over 3% earlier in the session after the government announced an increase in the Foreign Direct Investment (FDI) limit to 100% from 74%. LIC, Go Digit Insurance, Max Financial, ICICI Lombard and New India Assurance also traded higher following the announcement.

However, the momentum reversed after the Budget proposed higher tax exemptions under the new tax regime, making income up to ₹12 lakh tax-free through rebates. Since the tax new regime creates concerns. ICICI Prudential fell 3.9% to ₹592.55, HDFC Life dropped 4.4% to ₹609.9, and SBI Life declined 6% to ₹1,396.

Industry Background

India’s insurance sector consists of 24 life insurers, 26 general insurers, six standalone health insurers, and one reinsurer- General Insurance Corporation. Over the years, the government has gradually increased the FDI limit in the sector. 

It was raised from 26% to 49% in 2015, then to 74% in 2021, and now to 100%.

Growth in FDI Inflows

The insurance sector has been among the top recipients of FDI in India’s service industry. However, insurance penetration in India remains lower than in many other countries. The increased FDI limit is expected to bring in more foreign investment, which could help insurers expand their operations.

Foreign Investment 

As of the December quarter, foreign shareholding in major insurance companies varied significantly. HDFC Life had the highest foreign holding at 25.14%, followed by ICICI Lombard at 24.36%. ICICI Prudential and SBI Life reported lower foreign stakes at 12.78% and 22.48%, respectively.

The insurance sector has seen multiple FDI limit revisions over the years. In the 2021 Budget, the cap was raised from 49% to 74%, allowing greater foreign participation. With the latest increase to 100%, the sector will be interesting to watch.

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