The government was set to raise the cap on foreign equity in the insurance sector from 26 per cent to 49 per cent, Anand Rao V Adsul, minister of state for finance (expenditure, banking and insurance), said on Saturday.

He said a decision would be taken in two months.

Speaking on the sidelines of a seminar on the growth of the insurance sector through client servicing and bancassurance, Adsul said the government was considering a proposal to allow up to 49 per cent foreign equity participation.

Increasing foreign ownership in insurance joint ventures has been a long-standing demand of the industry and one of the key recommendations of the N K Singh Committee report.

Incidentally, the Budget for 2003-04 has increased the cap on foreign direct investment in banks from 49 per cent to 74 per cent.

Even as the government has indicated that it will permit foreign companies to raise their stakes in insurance joint ventures to 49 per cent, the Insurance Regulatory and Development Authority is not in favour of the plan.

There is a tussle between the finance ministry and IRDA. The regulations state that an Indian shareholder will have to bring down its stake to the same level as that of the foreign partner 10 years from opening up the sector.

With each side allowed to hold 26 per cent, the balance will have to be offloaded to the public.

At present, foreign stake in insurance companies is restricted to 26 per cent, with Indian partners holding majority stake.

With insurance companies increasing share capital proportionate to growth in business, the Indian partners -- for whom insurance is not a core activity -- are being forced to shell out in the same proportion.

At the same time, most insurance ventures are functioning as 50:50 partnerships, with several foreign partners having management control.

"We would like our equity stake to reflect our management control in the joint venture," said an official representing the Allianz group in the two Indian joint ventures with Bajaj Auto.