Impacts of the Insurance (Amendments) Act, 2021 on FDI and Insurance Companies
Recently, the GOI (Government of India) has passed the Insurance Amendment Act 2021, on 25th March 2021 to amend the provisions of the Insurance Act 1938.
Further, the said amended act has received the presidential assent on 25.03.2021 and can inherit effect from the date chosen for publication by the Central Government.
It had been made official that the Foreign Direct Investment within the insurance sector will increase to 74% from 49%. While concluding the speech respected minister of finance also mentioned that it's proposed to amend the Insurance Act of 1938. The changes had to be brought through an amendment which was produced in the Parliament and got its assent from the Rajya Sabha and was enforced in April 2021.
With the change in the provisions of the FDI, certain new rules and regulations are also brought under the new framework which is as follows:
HISTORY OF ADVENT OF FDI IN THE INSURANCE SECTOR
India first opened the insurance sector within the year 2000 under the Atal Bihari Vajpayee government when it allowed private sector firms to line up insurance companies and allowed FDI of 26 percent. then, for an extended time, there are demands from the industry to further increase this cover to 49 percent. The Amendment done in 2015 changed the provision from 26% to 49%.
The amendments made in the years 2015 and 2021 enable the companies to use foreign capital whenever they are in a need of it. It is a crucial shift instance because the rise within the FDI cap means insurance companies can now be foreign-owned and controlled as against this situation wherein they're only Indian owned and controlled. This might provide a far-off company the right to appoint a majority of directors, control the management, and thus the policy decisions taken.
This amendment has also been done in the view of weakening economy in the form of the downgrade of GDP as a result of the covid-19 pandemic, the Government is trying to increase the foreign capital influx in the country to overcome the economical despair.
The key objective of the Insurance Amendment Act 2021
The key objective of the act is to realize the aim of the Government’s FDI (Foreign Direct Investment) policy by raising the edge limit of the foreign investment within the Indian insurance companies from the prevailing 49 percent to 74 percent and to allow the foreign ownership and control with the safeguards.
Key Provisions of the Amended Insurance Act
The key provisions of the amended Insurance Act are often summarised as:
The existing section 2 clause (7A) sub-clause (b) is going to be substituted with new provisions. The entire aggregate holdings of the equity shares by the foreign investors comprising of portfolio investors can’t exceed 74 percent of the entire paid-up equity capital of such an Indian insurance firm and therefore the foreign direct investment is going to be subject to the conditions & manner, as could also be specified.
This amendment says that the foreign investment limit acceptable for the Indian insurance companies can not be more than 74% which was earlier 49% and foreign investment in insurance companies shall be “subject to such conditions and manner, as could even be prescribed.”
It shall be noted that within the provision of section 27 of the principal Act, i.e., the Insurance Act 1938, the reason stated in sub-section (7) will be omitted. The explanation to Section 27(7) that provided the provision which stated the necessity for the insurance company incorporated in India to hold assets in a trust where at least:
(i) 33% of capital is owned by investors domiciled outside India.
(ii) 33% of the members of the governing body are domiciled outside India, now stands omitted;
It shall be noted that within the provision of section 114 subsection (2) clause (aaa) of the principal Act, i.e., Insurance Act 1938[1], shall be substituted with the new one, which is as (aaa), the conditions and therefore the manner of the foreign direct investment under sub-clause (b) of clause (7A) of section 2. The provision that the insurance firms must be owned as well as executed by an Indian now stands omitted and it has been stipulated that the conditions and manner of foreign investment shall be as prescribed.
IMPACT ON INDIAN INSURANCE COMPANIES
India has about 60 insurance companies specializing in life assurance, non-life insurance, and insurance. The number of state-owned firms is only six and therefore the remaining are within the private sector. A better FDI limit will help insurance companies access foreign capital to satisfy their growth requirements. Insurance may be a capital-intensive business. Simply put, as an insurance firm sells more policies and collects premiums from policyholders, it needs higher capital to make sure that it's ready to meet the longer-term claims.
The insurance regulator, the Insurance Regulatory and Development Authority of India (IRDAI), mandates that insurers should maintain a solvency ratio of a minimum of 150 percent. The solvency ratio is that more than assets over liabilities. Insurance may be a long gestation business. It takes companies 7-10 years to break even and begin becoming profitable. Allowing FDI up to 74 percent could see more interest from foreign insurance companies who specialize in this business and who bring the so-called ‘patient’ capital. In addition, the Government will prescribe a selected percentage of the profits which will need to be treated as general reserve.
This will make sure that reserves are going to be available to satisfy the claims of policyholders no matter how investors’ economic condition is, minister of finance Ms. Nirmala Sitharaman said in her reply to the talk on the bill in Rajya Sabha. It'll also mean that the government will make sure that only a neighborhood of the profit is repatriated to the foreign promoter and there's sufficient money available with the insurance firm to pay every claim.
The Government has also reiterated that the rules of Section 27(E)of the insurance act will still be applicable. This suggests that no insurance firm, regardless of its foreign shareholding, can directly or indirectly invest the cash of the policyholders outside India. The insurance companies also will need to make sure that 50 percent of the administrators are independent directors so that insurance companies follow all Indian laws.
Conclusion
The Amendment Act of 2021 has been introduced with the sole motive to increase FDI percent in the insurance sector for this the Insurance Act, 1938 was amended accordingly, however, the responsibility currently dishonesties upon the Watchdog which is IRDA. The IRDAI may also prescribe conditions/restrictions concerning matters such as connected party transactions, and payment of dividends by an insurance company having majority foreign investment. Though, the degree to which these circumstances will be completely appropriate to cover businesses' leftovers to be understood. In a nutshell, to accomplish the target of the Government’s FDI policy, the Government has amended the provisions of the Insurance Act, 1938, and has increased the limit of Foreign Investment within the Indian Insurance Companies from 49% to 74%. The said amended act is going to be effective from the date assigned by the Government for publication within the Official Gazette.
This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts that have been made to ensure the accuracy and correctness of the information published, White Code Legal and Tax shall not be responsible for any errors caused due to human error or otherwise.
