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13 April 2021
For several years, stakeholders in the Indian insurance sector have wanted the foreign direct investment (FDI) limit for Indian insurers to be increased to 74% in parity with the FDI limit applicable to the private banking sector. On 1 February 2021, pursuant to the central budget speech for the financial year 2021-2022, the finance minister announced that the FDI cap for Indian insurers will be increased from 49% to 74%. In addition, it was announced that under the new framework:
Following the budget speech, on 25 March 2021 the Insurance (Amendment) Act 2021 was notified, which introduced as follows:
The amendment act will enter into force on such date as the central government may, by notification in the Official Gazette, appoint. As this date is yet to be notified, it is unclear when the amendment act will become enforceable. In addition to the foregoing, to give effect to the relaxation of the FDI limit, amendments to the extant FDI policy, the Insurance Companies (Foreign Investment) Rules 2015 and the Foreign Exchange Management (Non-debt Instruments) Rules 2019 will be required.
Once the amendment act enters into force (with corresponding changes being made to the foreign exchange norms), additional amendments will be required to the extant insurance regulatory framework. The following regulations and guidelines may need to be amended to some extent:
In addition, in tandem with the norms stipulated for insurance intermediaries, the IRDAI may prescribe conditions and restrictions with respect to matters such as related party transactions and payment of dividends by insurers with a majority foreign investment. However, the extent to which these conditions will apply to insurers remains to be seen.
Once the foregoing norms are implemented, stakeholders in the Indian insurance sector may choose to revisit existing arrangements with joint venture partners or other foreign investors. In addition, Indian insurers may need to revisit their governance structurers (including matters such as the composition of the board of directors) in line with the new requirements promulgated by the IRDAI.
Overall, the increase in FDI for insurers is a key development at a time when new investments in the insurance space have been limited. However, even with the notification of the amendment act, it is still unclear as to when the amendments will come into effect. Further, as the requirements of Indian ownership and control are to some extent still entrenched in the regulatory framework, the implementation of the amendment act is likely to leave the market in a temporary state of flux, until such time that all corresponding changes are introduced under the relevant regulations and guidelines.
For further information on this topic please contact Shubhangi Pathak or Priya Misra at Tuli & Co by telephone (+91 11 2464 0906) or email (email@example.com or firstname.lastname@example.org). The Tuli & Co website can be accessed at www.tuli.co.in.
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