India: M&A + Regulatory Hotline 49% FDI In Insurance: A Long Successful Battle

The amendments to the insurance laws in India to increase foreign investment limits to 49% from the existing 26% in the insurance sector has been subject to many a political debate. The new government was keen to push through this economic reform which had been languishing since 2008 but received strong opposition in the various houses of parliament. Despite the opposition, ordinances and rules were passed by the Government of India proving temporary legal backing to the amendment. However the logjam has been put to rest with the upper house of parliament assenting to the amendments proposed by the Government on March 12, 2015. In this hotline we have analysed the various events which finally led to the increase of foreign investment in India and the implications on the industry at large. The Government of India ("GoI"), by a notification dated February 19, 2015 has notified the Indian Insurance Companies (Foreign Invest ment) Rules, 2015 ("Rules") permitting investment of up to 49% in the insurance sector, with any investment above 26% being under the approval route.

Background

Under the Insurance Act, 1938 ("Insurance Act"), an 'Indian Insurance Company' 1 was permitted to have foreign investment of up to 26% of the equity share capital of the company. Out of 23 private life insurers, more than 20 had foreign investment of above 22%. Additionally, out of 17 non-life insurers in the private sector, 14 had more than 22% foreign investment 2. The Indian insurance sector has seen low penetration in the country essentially because of dearth of funds to permit growth and accordingly, it was felt that there was need for permitting additional foreign investment into the insurance sector.

Realizing this requirement, the amendment to the Insurance Act to increase the maximum permitted foreign shareholding to 49% was introduced in 2008, and has been pending since, when the Insurance Laws (Amendment) Bill ("2008 Insurance Bill") was tabled in the Rajya Sabha on December 22, 2008. An amendment of the Insurance Act is required, since unlike other sectors, the Insurance Act lays the maximum foreign shareholding permitted in an Indian insurance company. Accordingly, a notification by the Central Government or a notification under the exchange control regulation would not be sufficient. This 2008 Insurance Bill was referred to the Standing Committee on Finance, which submitted its report on December 13, 2011. Subsequently, some amendments to the 2008 Insurance Bill were introduced in July 2014. These amendments were then referred to the Select Committee in the Rajya Sabha who submitted a report on December 11, 2014 which included a revised Insurance Laws (Amendme nt) Bill.

The 2008 Insurance Bill could not be passed in the winter session of the Parliament in 2014. To clarify its intent to bring in the changes, the Central Government notified the Insurance Laws (Amendment) Ordinance, 2014 on December 26, 2014 ("Ordinance") to amend the Insurance Act giving interim legal standing to the new amendments. Under the Ordinance, the foreign investment permitted in an Indian Insurance Company was increased from 26% to 49% of the company. However, the insurance company would necessarily be required to be Indian owned and controlled.

The Ordinance required the approval of both the houses of the Parliament in the ongoing session. If the Ordinance was not cleared by both the houses of the Parliament, the Ordinance would have lapsed on April 5, 2015. Notwithstanding that the Ordinance still required the approval of the Parliament, the Government and its departments in the interim brought about the following:

  • The Government of India ("GoI"), by a notification dated February 19, 2015 notified the Indian Insurance Companies (Foreign Investment) Rules, 2015 ("Rules") permitting investment of up to 49% in the insurance sector.
  • The Department of Industrial Policy and Promotion, Ministry of Commerce ("DIPP") on March 2, 2105 issued Press Note No. 3 of 2015 ("Press Note") affecting changes in the exchange control laws to give effect to the increased foreign investment limits.

The Insurance Law (Amendment) Bill 2015 ("2015 Insurance Bill") was finally tabled on March 3, 2015 in the Lok Sabha.

The 2015 Insurance Bill has been passed by the Lok Sabha on March 3, 2015 and by the Rajya Sabha on March 12, 2015. The Ordinance shall now be replaced by the 2015 Insurance Bill once it receives the assent of the President.

Changes brought about by the amended legislation and analysis

Foreign investment: 26% to 49%

  1. The 2015 Insurance Bill the Rules and the Press Note clarify that the maximum foreign investment permitted in the equity shares of an Indian Insurance Company shall be 49% (forty nine percent) compared to 26% (twenty six percent) earlier.
  2. Foreign investment would be under the automatic route up to 26% and under the government or approval route for any investment above 26% till 49%.
  3. The cap of 49% shall include direct and indirect foreign direct investment as well as foreign portfolio investment. Foreign portfolio investment has been defined to include investments by foreign institutional investors, qualified financial investors, foreign portfolio investors and non-resident investors.
  4. The mechanism for calculation of indirect foreign investment continues to remain the same.
  5. The Press Note clarifies that the company bringing in capital would be required to obtain necessary licenses from the Insurance Regulatory Development Authority of India ("IRDAI") for undertaking insurance activities.

Analysis:

  • The changes introduced are in line with the budget speech of 2015 and the Ordinance, increasing the foreign investment limits from 26% to 49%, with any investment above 26% being under the approval or government route.
  • The calculation of foreign investment into insurance companies has been explained to include foreign direct investment and portfolio investment (which includes non-resident Indian investment). This is similar to the mechanism for calculation of foreign investment into insurance company till now, which was capped at 26%. Additionally, foreign investment also includes any investment in the promoter entities of such insurance companies, by the foreign companies (or its subsidiar ies), non-resident inv estors or other foreign investors who hold shares in the insurance companies.
  • Under the Insurance Act, insurance companies were permitted to have issue only one class of equity shares, and no other form of share capital was permitted. This made structuring of investments in the form of preference shares or other instruments difficult.3 The Ordinance, however, permitted the IRDA to prescribe such other classes of shares which may be issued by the insurance companies. However, IRDAI has not made any change to the existing regulations, and the share capital of an Indian insurance company can only contain equity shares currently.

Control and ownership

The Indian Insurance Company shall at all times ensure that its ownership and control is with Indian residents. Indian ownership is defined to mean more than 50% (fifty percent) of the equity share capital being held by Indian residents. Control is defined to include the right to appoint majority directors on the board of the company or to control the management or policy decisions, including by virtue of shareholders or management rights or shareholder agreements or voting agreements. The definitions of 'ownership' and 'control' are in line with the definitions of 'control' and 'ownership' under the foreign direct investment ("FDI") policy 2014 ("FDI Policy").

Analysis:

  • The Insurance Act earlier did not provide for control and ownership of an Indian insurance company to be with resident individuals. As a consequence, it was possible for offshore strategic partners in the insurance sector to have substantial control rights, including reserved matters or veto rights on operational and financial policy decisions of the joint venture.

This may be a concern for offshore partners in joint ventures. The definition of 'control' under the Rules is similar to that under the FDI Policy and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. The Foreign Investment Promotion Board ("FIPB") had raised concerns with Etihad Airways enjoying veto and quorum rights under its investment agreement with Jet Airways, and these rights were made to be watered down. Similar instances of reducing extent of rights in Indian insurance companies by offshore partners may be seen in future.

There is no pre cedent as to how IRDAI interprets the requirements of control and ownership being in the hands of Indian residents. Having said that, extensive veto rights, which offshore joint venture partners in the insurance sector have traditionally enjoyed, may now not pass the FIPB test of 'control', and may have to be curtailed.

Other changes

  • Applicability of the 49% foreign investment

The increase in foreign investment in the insurance sector would be applicable to insurance brokers, third party administrators ("TPA"), surveyors, loss assessors and other insurance intermediaries appointed under applicable IRDAI regulations.

The FDI Policy included the limit of 26% (twenty six percent) for insurance companies, insurance brokers, third party administrators, surveyors and loss assessors. The appropriate regulations for certain intermediaries clarified that the limit of foreign investment in the relevant int ermediary would not be more than 26% (twenty six percent) - such as for TPAs under the IRDA (Third Party Administrators- Health Services) Regulations, 2001, for insurance brokers under the IRDA (Insurance Broker) Regulations, 2002 and for insurance surveyors under the Insurance Surveyors and Loss Assessors (Licensing, Professional Requirement and Code of Conduct) Regulations, 2000.

There was certain ambiguity as to whether 100% FDI was permitted in other intermediaries which did not fall under the categories specifically mentioned under the FDI Policy, such as corporate agents. For instance, Berkshire India Private Limited, a wholly owned subsidiary of Berkshire Hathaway Inc. acted as a corporate agent in India. It was argued that since there is no specific restriction on foreign investment on corporate agents under the IRDA (Licensing of Corporate Agents) Regulations, 2002 or under the FDI Policy, 100% FDI was permitted in these intermediaries.

The Rules now clarify that the restriction on forei gn investment shall also be appli cable to 'other insurance intermediaries appointed under applicable IRDAI regulations', thereby plugging the necessary gaps.

However, there is some ambiguity about the status of those intermediaries which already have more than 49% foreign shareholding. Since they were not required to restrict their foreign shareholding, it is unclear whether they would be asked to bring down their foreign shareholding, or would a status quo be granted.

  • Exception

An exception from the 49% restriction on foreign investment has been for a bank which is functioning as an insurance intermediary. In case the revenue of such bank from non-insurance related business is in excess of 50% (fifty percent) of the total revenue in any financial year, the foreign equity limit as applicable in the banking sector would apply to such banks.

The Press Release has further clarified that Clause 6.2.17.2.2 (i) (c) shall be applicable for banks having a joint venture/ su bsidiary in the insurance sector. Accordingly, all applications for foreign investment by private banks shall be addressed to the Reserve Bank of India, which shall consider the same in consultation with the IRDA.

Conclusion

The passage of the 2015 Insurance Bill indicates a welcome intent of the Indian Parliament towards the economic development of the country. With the recent changes, the Indian insurance industry is finally ready to take off. The change was the demand of the industry for long. Greater economic rights would encourage foreign partners bring more insurance products in the Indian market. Additional investment of an estimated USD 3.2 billion is expected in the insurance sector 4, which shall provide Indian insurance companies much required funds, and discussions between the joint venture partner s have already commenced. 5 The future of the insurance industry seems to be secured, for now at least.

1 Under Section 2C of the Insurance Act, 1938, no insurer other than an 'Indian Insurance Company' is permitted to commence or carry on any class of insurance business after the commencement of the Insurance Regulatory and Development Authority Act, 1999

2 IRDA Annual Report for the year ended March 31, 2014, available online www.irda.gov.in

3 Investing through preference shares, is preferred, especially for foreign shareholders, since preference shares gives priority with respect to payment of dividend and payments at the time of liquidation.

4 http://www.bloomberg.com/news/articles/2015-03-13/indian-insurance-bill-may-attract-3-2-billion-from-foreigners

5 http://articles.economictimes.indiatimes.com/2015-01-05/news/57705481_1_max-bupa-max-india-health-insurance-venture

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Phoenix Legal
Phoenix Legal
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Phoenix Legal
Phoenix Legal
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions