The long awaited increase in foreign holdings in an Indian
insurance company from 26% to 49% is at long last law but, rather
than becoming law through the usual legislative process, it has
become law through an unusual and temporary device: an ordinance.
That places an unwelcome question mark over the resilience of this
otherwise welcome reform.
The Journey to the Ordinance: 1991 -2014
1991: The government's embarks on its policy of
1993-94: The Malhotra Committee is set up by the government to
suggest reforms to the then nationalised insurance sector. It
recommends allowingprivate competition, and permitting foreign
investment in Indian Insurers subject to a cap on foreign
1999-2000: The Insurance Regulatory & Development Authority
(IRDA) is formed to regulate the insurance industry and to develop
the insurance market. Foreign investment in an Indian Insurer is
capped at 26%.
2004: The Congress coalition government proposes raising the
foreign investment cap from 26% to 49%, but meets strong
2008: The Insurance Laws Amendment Bill 2008 is introduced by
the Congress coalition government. It contains a number of reforms,
including raising the foreign investment cap to 49%.
2013: The Congress coalition government creates the framework
for an increase to 49% once the Insurance Bill is passed by
parliament, but the bill is not passed.
July-August 2014: A BJP led government seeks to pass the
Insurance Bill that it had opposed when in opposition, but in turn
runs in to opposition, including from the Congress party. A
parliamentary select committee is formed review the Insurance
December 2014: The select committee suggests amendments, but
the Insurance Bill is not passed in the winter session of
parliament, which ended on 23 December 2014.
The Passing of the Ordinance: 26 December 2014
Citing the urgency of implementing insurance reforms, the
government decided to bypass the parliamentary logjam by using the
ordinance route to pass the Insurance Bill. The Indian Constitution
permits the President of India to pass emergency temporary laws
when parliament is not in session. The day after parliament rose at
the end of the winter session, the cabinet recommended that the
President pass the Insurance Bill through the ordinance route.
On 26 December 2014, the President formally assented to the
cabinet's recommendation and the Insurance Laws (Amendment)
Ordinance 2014 came into effect.
The Main Features of the Insurance Laws (Amendment) Ordinance
The Ordinance is virtually the entire Insurance Bill as amended
by the Select Committee, and the following main changes to the
existing law are now in force:
The cap on foreign investment has been lifted from 26% to 49%.
However, an Indian Insurer must still be "controlled" by
Indians. The definition of "control" borrows from the
Companies Act 2013, and is defined as the right to appoint a
majority of the directors, to control management, and to control
Foreign companies are permitted to open branches to write
reinsurance business in India.
Lloyd's is permitted to access the Indian market as the
branch of a foreign Reinsurer.
The Securities Appellate Tribunal may now hear appeals against
the orders or decisions of the IRDA.
A fine of up to Rs.250m/c. $3.9m may now be imposed for
carrying on insurance business without registration. Fines for
other breaches of the statutory and regulatory framework have also
been significantly increased.
Impact of the Ordinance
Unless the validity of the Ordinance is confirmed by parliament
within 6 weeks of its next sitting, the ordinance will cease to
operate - although acts under the ordinance while it was effective
remain valid and effective. Accordingly, the next sitting of
parliament is in February 2015 and (unless adopted by parliament)
the Ordinance will cease to have effect at the earlier of the
expiry of 6 weeks from the reassembly of parliament, resolutions
disapproving the Ordinance being passed by both houses of
parliament, or the President withdrawing it.
As we said at the outset, the mechanism by which the reforms
have been introduced places an unwelcome question mark over the
resilience of these otherwise welcome reforms. It will be
interesting to see how many take advantage of the window of
opportunity made available by the Ordinance, how many have to
proceed to increase their Indian shareholdings because existing
Indian joint venture arrangements say so, and how many will
continue to wait until a more permanent environment emerges.
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