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 India's 2021-2022 Budget proposals to relax foreign-ownership caps on insurers and listing of LIC will help the industry attract foreign capital, strengthen solvency and promote competition, Fitch Ratings has said.

Besides, the ratings agency said, these proposals could encourage global insurers to enter the fast-expanding Indian market, while international insurers already holding minority stakes in domestic companies may try to increase their ownership over the medium term.

The Union Budget FY22 has proposed to raise the foreign-ownership limit on insurers to 74 per cent from 49 per cent, which will allow foreign investors to hold majority stakes in India-based insurer for the first time.

Besides, the Centre also proposed new requirements to ensure sufficient local participation, such as the majority of insurers' key management personnel and board members to be resident Indians and a requirement that at least half of the board comprises independent directors.

Furthermore, the government plans to specify a percentage of profit to be retained as general reserve within the insurer to prevent excessive capital extraction by foreign parents.

"Fitch expects a relaxation of foreign-ownership rules to attract international insurers and promote competition within the sector. This will, in turn, increase the insurers' access to capital and thereby improve the industry's solvency position," the agency said in a statement.

"We also believe that an influx of new capital could be channelled to develop insurers' distribution networks, enable digitisation and bring expertise to areas such as marketing and client servicing, which will improve insurance penetration in the long run."

In addition, the government has used the Budget to reiterate its commitment to list India's largest state-owned insurer, Life Insurance Corporation of India, through an IPO in financial year ending March 2022.

"We believe the listing will improve the insurer's accountability and transparency, while attracting more foreign interest in the industry.

"The proposed IPO, once executed, could broaden the insurer's capital base and improve its regulatory capital position, which was 165 per cent at the end of September 2020, marginally above the regulatory minimum of 150 per cent."

Additionally, the Centre has expressed its intention to privatise a non-life insurer along with some state-owned banks and corporations to meet its disinvestment target.