Liberalization of FDI In Insurance Companies – A Look at the Steps Taken Since the Budget Announcement:

The industry is now well versed with the move to liberalize foreign direct investment (“FDI”) in Indian insurance companies to 74%, from the prevailing cap of 49%. The announcement was first made by the Minister of Finance Ms. Nirmala Sitharaman on February 1, 2021, as a part of her budget presentation. The move followed the rise in FDI limits to 100% in insurance intermediaries, which was announced by Ms. Sitharaman in July 2019 and came into effect in September 2019.

It appears that the Government is now acting swiftly with the legislative changes to effect the proposal to extend FDI in insurance companies to 74%. Both households of the Indian Assembly lately agreed to the Cover (Amendment) Bill, 2021 (“Amendment Bill”), to alter the Cover Act, 1938 (“Insurance Act”). The Rajya Sabha passed the Amendment Bill on March 18, 2021, and the Lok Sabha passed the Bill on March 22, 2021.

The Amendment Bill has caused changes to the definition of an “Indian Insurance Company” as provided within the Insurance Act. It now clarifies that an “Indian Insurance Company” means any insurer, being a corporation, which is restricted by shares, and, -

”...

 (b) during which the mixture holdings of equity shares by foreign investors including portfolio investors, don't exceed seventy-four percent of the paid-up equity capital of such Indian insurance firm, and therefore the foreign investment during which shall be subject to such conditions and manner, as could also be prescribed.

 … ”

The Amendment Bill also brings changes to Section 114(2)(aaa) of the Insurance Act whereby, the Central Government retains its power to form rules, but now about “… the conditions and manner of foreign investment …”. As per the “Memorandum regarding Delegated Legislation” as attached to the Amendment Bill “the matter in respect of which the principles could also be made are matters of procedure and administrative details, and intrinsically, it's not practicable to supply for them within the proposed Bill itself, the delegation of legislative power is, therefore, of a traditional character.” The Central Government, therefore, reserves its ability to form rules on any and everyone matters about foreign ownership and control in insurance companies.

Under the 49% cap, Indian insurers were required to make sure that the control over their affairs and management is vested with Indian promoters. To the present effect, the IRDAI permitted foreign investors to retain only such rights, which were protective, and which didn't impede the day-to-day operations of the insurer. During a similar spirit, Ms. Sitharaman had complete it strong that distant possession and switch of cover businesses as per the augmented FDI bounds will be allowable “with protections” and naturally, the declaration of objects and reasons to the Amendment Bill also states that the rise of FDI limit to permit foreign ownership are going to be subject to “safeguards”. However, unfortunately, the Amendment Bill itself doesn't shed any light on the particular nature of safeguards proposed to be implemented under the liberalized regime.

While making the announcement, Ms. Sitharaman was cited as a proverb: “under the new construction, the unpackaged of managements on the panel and key organization people would be local Indians, with a least of 50 percent of managements being self-governing management, and stated fraction of profits being booked as overall assets”. Further, considering the foreign investment conditions applicable to non-public sector banks and insurance intermediaries, a number of the opposite “safeguards” may include restrictions on related party transactions between the insurance companies and therefore the foreign investor(s) (or their group companies) also as prior approval requirements about the insurance company’s ability to pay dividends to its shareholders. In any event, stakeholders will get to wait and await the principles which will be issued. It'll be interesting to ascertain whether the principles adhere strictly to the safeguards as hinted by Ms. Sitharaman in her Budget speech or whether their scope could also be expanded, given the regulatory regime surrounding other financial service providers.

Like it or not, the changes to the Insurance Act are just one of the various modifications required to be made to the extant regulatory framework to effect the large Budget Announcement. These additional vicissitudes which are obligatory are as shadows: (i) amendment to the IRDAI (Registering of Indian Cover Businesses) Rules, 2000, (ii) alteration to the Indian Insurance Businesses (Foreign Investment) Rules, 2015, issued by the Department of monetary Services, Ministry of Finance, Government of India, (iii) amendments (or repeal) of the rules on Indian Owned and Controlled, dated October 19, 2015, issued by the IRDAI (iv) amendment to the exchange Management (Non-Debt Instruments) Rules, 2019, issued by the Department of Economic Affairs, Ministry of Finance, Government of India and (v) Amendment of the Consolidated Foreign Direct Investment Policy of India, issued in 2020 by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India. Amendment to the Insurance Act is simply the primary step, but a step is well taken, no doubt.

Footnotes:

https://dipp.gov.in

https://www.moneycontrol.com

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