Introduction

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:

  • foreign ownership and control would be allowed with safeguards;
  • the majority of directors on an insurer's board of directors and key management persons would be required to be resident Indians;
  • 50% of directors would need to be independent directors; and
  • a specified percentage of the insurer's profits would have to be retained as a general reserve.

Insurance (Amendment) Act

Following the budget speech, on 25 March 2021 the Insurance (Amendment) Act 2021 was notified, which introduced as follows:

  • The amended Section 2(7A)(b) states that:
    • the limit of foreign investment allowed in Indian insurers cannot exceed 74% (previously 49%); and
    • foreign investment in insurers must be "subject to such conditions and manner, as may be prescribed".
  • The amended Section 27(7) has omitted its previous requirement for insurers incorporated in India to hold assets in trust where at least:
    • 33% capital is owned by investors domiciled outside India; or
    • 33% of the members of the governing body are domiciled outside India.
  • The amended Sections 2(7A) and 114(2)(aaa) have omitted the requirement for insurers to be Indian owned and controlled. It has been stipulated that the conditions and manner of foreign investment will be as prescribed.

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:

  • The Insurance Regulatory Development Authority of India (IRDAI) (Registration of Indian Insurance Companies) Regulations 2000 may need to be amended to:
    • omit the requirement of submitting an affidavit confirming that FDI in the insurer does not exceed 49% under the R2 application;
    • introduce a new category of promoters (ie, foreign promoter) which will be persons or entities incorporated outside India. At present, the regulations envisage only the existence of an 'Indian promoter' and the scope of this term may need to be amended to allow for foreign promoters in Indian insurers;
    • omit the requirement of submission of confirmation in relation to compliance with Indian ownership and control and to omit corresponding requirements under the regulations; and
    • stipulate approval requirements from the regulator of the host country (if any) for foreign entities seeking to be promoters of Indian insurers.
  • The IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations 2015 may need to be amended to:
    • make amendments to their definition section, based on the corresponding changes introduced under the registration regulations;
    • introduce norms on the conditions for the approval of the transfer of shares in the event that a new category of promoter is introduced (ie, foreign promoter);
    • include changes to the documentation requirements stipulated under forms prescribed under the transfer regulations, to include copies of approval received from other authorities (Indian or foreign) if such prior approval is contemplated; and
    • omit the requirement of Indian ownership and control as envisaged under Form B.
  • The IRDAI (Issuance of Capital by Indian Insurance Companies transacting other than Life Insurance Business) Regulations 2015 and the IRDAI (Issuance of Capital by Indian Insurance Companies transacting Life Insurance Business) Regulations 2015 may need to be amended to omit the requirement of submission of confirmation in relation to compliance with Indian ownership and control and to omit corresponding requirements under the regulations.
  • The Guidelines on Indian Owned and Controlled of 19 October 2015 will need to be amended. Per the budget speech, foreign ownership and control of Indian insurers will be permitted with safeguards. Hence, there are two possibilities:
    • the guidelines will be amended considerably to provide safeguards for foreign ownership and control; or
    • the guidelines will be repealed completely and fresh guidance will be issued.
  • The Guidelines for Corporate Governance for Insurers in India of 18 May 2016 may need to be amended to:
    • amend the provision which stipulates that a minimum of three independent directors are required to be appointed to the board and to provide that 50% of board directors must be independent directors (in line with the budget speech);
    • mandate that the majority of directors on the insurer's board of directors and key management persons are resident Indians; and
    • omit the requirement of Indian insurers being Indian owned and controlled.
  • The IRDAI (Assets, Liabilities and Solvency Margin of General Insurance Business) Regulations 2016 and the IRDAI (Assets, Liabilities and Solvency Margin of Life Insurance Business) Regulations 2016 may need to be amended to provide for the requirement of a specified percentage of the insurer's profits being retained as a general reserve, in line with the budget speech.
  • The IRDAI (Investment by Private Equity Funds in Indian Insurance Companies) Guidelines 2017 may need to be amended to omit the requirement of Indian insurers being Indian owned and controlled.

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.

Comment

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.