The relaxation of foreign investment limits for insurance intermediaries has long been the subject of debate, with many industry participants eagerly awaiting the relaxation of foreign direct investment (FDI) limits and the withdrawal of Indian ownership and control norms. Various stakeholders, including industry participants, advocated in favour of increasing the level of foreign investment permitted in the insurance sector, believing that this would encourage more technical expertise and funding in the insurance intermediary space. On 2 September 2019 the Insurance Regulatory Development Authority of India (IRDAI) notified the Indian Insurance Companies (Foreign Investment) Amendment Rules 2019 (amendment rules), effectively allowing 100% FDI in insurance intermediaries (for further details please see "100% FDI in insurance intermediaries: a welcome change"). Pursuant to the amendment rules, the IRDAI notified the IRDAI (Insurance Intermediaries) (Amendment) Regulations 2019, which introduced amendments to the regulations governing insurance intermediaries in line with the amendment rules (for further details please see "FDI in insurance intermediaries – an update"). Further, the IRDAI issued the Circular on Withdrawal of Indian-Owned and Controlled Condition for Insurance Intermediaries of 19 November 2019, withdrawing the Indian ownership and control norms applicable to insurance intermediaries and thereby paving the way for wholly owned subsidiaries of foreign entities to be set up in India.
However, despite these relaxations, insurance intermediation remains a regulated activity and all insurance intermediaries must continue to comply with the regulatory norms on the setting up and operation of insurance distribution business. With the intent of regulating the repatriation of dividends by insurance intermediaries with a majority foreign investment, the IRDAI further notified the Guidelines on Repatriation of Dividends by Insurance Intermediaries Having Majority by Foreign Investors of 3 January 2020 (repatriation guidelines). In addition, the IRDAI notified the Circular on Foreign Investment in Insurance Intermediaries of 18 May 2020 (undertaking circular), mandating the submission of an undertaking by insurance intermediaries.
Rule 9(3) of the Insurance Companies (Foreign Investment) Rules 2015 (as amended) stipulates that an insurance intermediary that has a majority shareholding of foreign investors must obtain prior permission from the IRDAI to repatriate dividends. The repatriation guidelines prescribe the process, format and timelines for the filing and disposal of such applications. The repatriation guidelines also stipulate, among other things, the following additional norms to be followed by insurance intermediaries with a majority shareholding of foreign investors when repatriating dividends:
- The insurance intermediary must have a net worth of one-and-a-half times that of the statutorily required minimum paid-up capital after the proposed dividend payout.
- The dividend payout must be paid out of the insurance intermediaries' profit from the current year. Further, the IRDAI should not have placed any restriction on the insurance intermediary for the declaration of dividends.
- The dividend payout ratio cannot exceed 75%. It will be calculated as a percentage of the dividend payable in one year to the profit after tax during the year.
- The financial statements pertaining to the financial year for which the dividend is declared must be free from any qualifications by the statutory auditors which have an adverse bearing on the profit during the year.
The IRDAI has directed insurance intermediaries to submit an undertaking confirming compliance with:
- Press Note 3 of 17 April 2020 (press note), which stipulates that any entity of a country sharing a land border with India can invest in India only after obtaining the government's approval; and
- the Foreign Exchange Management (Non-debt Instruments (NDI)) (Second Amendment) Rules 2020 (NDI amendment rules), which amend the Foreign Exchange Management (Non-debt Instruments) Rules 2019 in line with the amendment rules.
The undertaking circular further stipulates that insurance intermediaries must ensure that the undertaking is duly signed by the principal officer or compliance officer and accompanied by a certified copy of the board resolution confirming compliance with the press note and the NDI amendment rules. Further, insurance intermediaries must obtain the necessary government approval with respect to compliance with the press note, where applicable. However, the IRDAI has yet to prescribe any timeline for submitting this undertaking. Further, it is unclear whether this undertaking must be submitted by all insurance intermediaries as a one-time compliance measure or at the time of obtaining approval for a change in the shareholding of the insurance intermediary entity.
100% FDI in the insurance intermediary sector is a welcome change. However, the IRDAI has issued considerable norms with respect to the management and functioning of insurance intermediaries that have a majority shareholding of foreign investors. Therefore, foreign investors must be aware of these norms when deciding whether to invest in insurance intermediaries in India. It remains to be seen how market participants and global insurance players will react to the introduction of additional regulatory obligations for foreign investment in insurance intermediaries.
It is still unclear whether the undertaking of compliance with FDI norms must be submitted by all insurance intermediaries as a one-time compliance measure or at the time of obtaining approval for a change in the shareholding of the insurance intermediary entity. Further, the applicability of additional norms (eg, appointment of a resident director and repatriation of dividends) introduced for insurance intermediaries with a majority foreign investment in relation to corporate agents (whose primary business is business other than insurance intermediation and which earn less than 50% of their revenue from insurance intermediation) has not been expressly clarified. Such corporate agents are not bound by the FDI limits applicable to the insurance sector per the extant Reserve Bank of India norms on foreign investment; hence, the justification for the applicability of additional IRDAI norms to such entities remains unclear. Clarity on the applicability of the norms and timelines for compliance will help to boost the confidence of foreign investors looking to invest in insurance intermediaries in India.
