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08 October 2019
The relaxation of foreign investment limits in the insurance sector has long been the subject of debate, with various stakeholders, including industry participants, advocating for an increase in this respect. As a first step towards achieving this end, on 26 December 2014 the Insurance Laws (Amendment) Ordinance 2014 was introduced to increase the limit of foreign direct investment (FDI) in Indian insurers from 26% to 49%.(1) Subsequent to the ordinance, the Indian Insurance Companies (Foreign Investment) Rules 2015 (Foreign Investment Rules) were notified. As regards insurance intermediaries, Rule 9 of the Foreign Investment Rules stipulated that as was the case with insurers, foreign investment in insurance intermediaries would be capped at 49%.
However, many felt that the parity in the FDI limits was unfair as, unlike insurers, insurance intermediaries are not custodians of policyholders' money. As a result, over a period of time, various industry stakeholders petitioned the Insurance Regulatory Development Authority of India (IRDAI) to relax the FDI limit applicable to insurance intermediaries.
In her 5 July 2019 budget speech, Finance Minister Nirmala Sitharaman proposed that the FDI limit in insurance intermediaries be increased from 49% to 100%. Subsequently, on 2 September 2019 the union government notified the Indian Insurance Companies (Foreign Investment) Amendment Rules 2019, which effectively increased the limit on FDI in insurance intermediaries to 100%.
Pursuant to the amendment, Rule 9 of the Foreign Investment Rules has been amended. It now states that there will be no cap on foreign equity investment for intermediaries or insurance intermediaries. However, where an entity's primary business is not insurance and the IRDAI permits it to function as an insurance intermediary, the foreign equity investment limits applicable to that sector will continue to apply to such intermediary, subject to the condition that its revenue from its primary (non-insurance-related) business constitutes more than 50% of its total revenue in any financial year.
Rule 9 of the Foreign Investment Rules further stipulates that the proposals for FDI in relation to insurance intermediaries will be allowed under the automatic route, subject to verification by the IRDAI. The amended rules further stipulate that an insurance intermediary that has a majority shareholding of foreign investors must:
In addition to the Foreign Investment Rules, insurers and insurance intermediaries must adhere to the Indian owned and controlled norms, as notified by the IRDAI. In this regard, insurance intermediaries must comply with the IRDAI's "Guidelines on Indian Owned and Controlled" of 19 October 2015. These guidelines stipulate that every insurance intermediary must be Indian owned and controlled at all times. To ensure Indian control, the following requirements must be complied with:
Notably, following the notification of the amendment rules, the IRDAI has not issued any notification or circular to clarify the continued applicability (if at all) of the IOC guidelines to insurance intermediaries in light of the relaxation of the FDI limit. However, with the notification of the 2019 Foreign Investment Rules, the IOC guidelines may be considered to have been overridden.
While most insurance intermediaries have welcomed the introduction of 100% FDI, certain domestic players have expressed their reservations. These players fear that 100% FDI will adversely affect small domestic insurance intermediaries which are fully owned and controlled by Indian entrepreneurs. It remains to be seen what steps (if any) the IRDAI will take to ensure that the encouragement of foreign investment does not disproportionately affect domestic players. In addition, the IOC guidelines must be amended to bring them in line with the Foreign Investment Rules.
For further information on this topic please contact Shubhangi Pathak or Priya Misra at Tuli & Co by telephone (+91 11 2464 0906) or email (firstname.lastname@example.org or email@example.com). The Tuli & Co website can be accessed at www.tuli.co.in.
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