In December last year, the Indian government raised the FDI
limit in the insurance sector from 26% to 49%. This was done
through the introduction of the Insurance Laws (Amendment) Act,
2015, the Indian Insurance Companies (Foreign Investment) Rules,
2015 ("Foreign Investment Rules") and by
undertaking amendments to paragraph 184.108.40.206 of the Consolidated
FDI Policy dated 12 May 2015.
Rule 3 of the Foreign Investment Rules restricts foreign
shareholding (directly or indirectly) to a maximum of 49% (i.e.,
Indian owned), and Rule 4 further mandates that an Indian Insurance
company be Indian controlled. In addition to the requirement of
being Indian owned and controlled, Regulation 11 of the Insurance
Regulatory and Development Authority (Registration of Indian
Insurance Companies) Regulations, 2000 ("Registration
Regulations") prescribes the computation methodology
for calculating foreign shareholding in an Indian Insurance
Company. It is interesting to note that this computation
methodology differs from the methodologies applied to other
industries / activities under the FDI policy.
As a result, under the current regime, the standard entry route
into the insurance business in India for a foreign player seems
restricted to setting up or investing in an Indian owned and
controlled entity in which its shareholding is limited to a maximum
of 49%. These revised FDI caps and computation methodologies also
apply to insurance intermediaries.
Interestingly though, for foreign players seeking to make a
greater investment in such a business (and enjoy corresponding
benefits, such as control, centralised holding etc.), there may be
other permissible structures.
Rule 9 of the Foreign Investment Rules extends the 49% cap to
Insurance Brokers, Third Party Administrators, Surveyors and Loss
Assessors and other insurance intermediaries appointed under the
provisions of the Insurance Regulatory and Development Authority
Act, 1999.However, the proviso to Rule 9 reads: "Provided
that where an entitylike a
Bank, whoseprimary business is
outside the insurance area, is allowed by the
Authority to function as an insurance intermediary,the foreign equity investment caps applicable in that
sector shall continue to apply, subject to the
condition that therevenues of such entities from
their primary (i.e. non-insurance related) business must remain
above 50 per cent of their total revenuesin any
financial year." (Emphasis supplied).
Given that the phrasing of the proviso to the Rule uses
'like a Bank', it is plausible that the benefit of
the proviso is not restricted only to banks, but extends
to all entities whose 'primary business is outside the
insurance area'. As long as the entity in question
operates outside the insurance business, and the revenues from its
primary (non-insurance) business account for more than 50% of its
total revenues (post undertaking the insurance business), it may
continue to avail of the potentially higher foreign investment cap
applicable to the sector of its primary business.
The proviso then seems to permit a situation in which foreign
players may enjoy significantly larger investment limits by using
an entity, currently operating in a sector which enjoys a 100% FDI
cap (such as e-commerce activities), to set up an insurance
business or operate it as an insurance intermediary (subject to
compliance with applicable insurance regulatory requirements and
approval from the Insurance Regulatory and Development
The elbow room afforded by the usage of 'like a
bank', whose 'primary business is outside the
insurance area' in the proviso, creates potential for the
use of unconventional structures, allowing foreign players to use
existing entities operating in sectors with greater investment caps
to engage in insurance business as well.
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