Stakeholders in Indian insurance companies have for several years now been seeking that the foreign direct investment (FDI) limit for Indian insurance companies be increased to 74% in parity with the FDI limit applicable to Banking – Private Sector. On 1 February 2021, pursuant to the central budget speech for the financial year 2021-22 (Budget Speech), the Indian Finance Minister announced that the FDI cap for Indian insurance companies would be increased from 49% to 74%. Additionally, it was also announced that under the new framework (i) foreign ownership and control would be allowed with safeguards; (ii) the majority of directors on the Board and key management persons would be required to be resident Indians; (iii) 50% of directors would need to be independent directors; and (iv) a specified percentage of profits of the insurance company would have to be retained as a general reserve.
Following the Budget Speech, on 25 March 2021, the Insurance (Amendment) Act 2021 (2021 Amendment Act) was notified. The amendments introduced by the 2021 Amendment Act are as follows:
- §2(7A)(b): The amended provision states that limit of foreign investment allowed in Indian insurance companies shall not exceed 74% (previously 49%), and foreign investment in insurance companies shall be "subject to such conditions and manner, as may be prescribed.";
- §27(7): The erstwhile Explanation to the provision which stipulated the requirement for an insurance company incorporated in India to hold assets in trust where at least: (i) 33% capital is owned by investors domiciled outside India, or (ii) 33% of the members of the governing body are domiciled outside India, now stands omitted;
- §2(7A) & §114(2)(aaa): The requirement for the insurance company to be Indian owned and controlled has been omitted, and it has been stipulated that the conditions and manner of foreign investment shall be as prescribed.
The 2021 Amendment Act states that the provisions of the 2021 Amendment Act shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint, and as this date is yet to be notified, at present it is not clear when provisions of the 2021 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 also be required.
Once the 2021 Amendment Act comes into effect (with corresponding changes being made to the foreign exchange norms), additional amendments will be required to the extant insurance regulatory framework. Potentially, inter alia, the regulations/guidelines listed below may need to be amended to some extent:
- the IRDA (Registration of Indian Insurance Companies)
Regulations 2000 (Registration Regulations):
- To omit the requirement of submitting an affidavit confirming that FDI in the insurance company does not exceed 49% under the R2 application;
- To introduce the concept of a new category of promoters (foreign promoter) who will be persons/entities incorporated outside India. At present the regulations only envisage existence of an "Indian promoter" and the scope of this term may need to be amended to allow for foreign promoters in Indian insurance companies;
- 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;
- To stipulate approval requirements from the regulator of the host country (if any) for foreign entities seeking to be promoters of Indian insurance companies.
- The IRDAI (Transfer of Equity Shares of Insurance Companies)
Regulations 2015 (Transfer Regulations):
- To make amendments to the definition section of the Transfer Regulations, based on the corresponding changes introduced under the Registration Regulations;
- To introduce norms on Conditions for Approval of transfer of shares in the event a new category of promoter is introduced (foreign promoter);
- To include changes to the documentation requirements stipulated under Forms prescribed under the Transfer Regulations, to include copies of approvals received from other authorities (Indian or foreign) in the event seeking such prior approval is contemplated;
- To omit the requirement of Indian ownership and control as envisaged under Form B.
- Amendment to the IRDAI (Issuance of Capital by Indian Insurance Companies transacting other than Life Insurance Business) Regulations 2015/ IRDAI (Issuance of Capital by Indian Insurance Companies transacting Life Insurance Business) Regulations 2015 to omit the requirement of submission of confirmation in relation to compliance with Indian owned and controlled and to omit corresponding requirements under the regulations.
- Amendment to the Guidelines on Indian owned and controlled of 19 October 2015 (IOC Guidelines) will be required. Per the Budget Speech, foreign ownership and control of Indian insurance companies will be permitted with safeguards. Hence there are two possibilities, (i) the IOC Guidelines will be amended considerably to provide safeguards for foreign ownership and control; (ii) the IOC Guidelines will be repealed completely and fresh guidance will be issued.
- Guidelines for Corporate Governance for insurers in
India of 18 May 2016 (CG Guidelines):
- To amend the provision which stipulates that a minimum of three independent directors are required to be appointed on the Board, and to provide that 50% of directors on the Board must be independent directors (in line with the Budget Speech);
- To mandate that the majority of directors on the Board and key management persons of the insurance company be resident Indians;
- To omit requirement of the Indian insurance company being Indian owned and controlled.
- Amendments to the IRDAI (Assets, Liabilities, and Solvency Margin of General Insurance Business) Regulations 2016/ IRDAI (Assets, Liabilities, and Solvency Margin of Life Insurance Business) Regulations 2016 may be made to provide for the requirement of specified percentage of profits of the insurance company being retained as a general reserve, in line with the Budget Speech.
- Amendment to IRDAI (Investment by Private Equity Funds in Indian Insurance Companies) Guidelines 2017 to omit the requirement for the Indian insurance company being Indian owned and controlled.
Additionally, in tandem with the norms stipulated for insurance intermediaries, the IRDAI may also prescribe conditions/restrictions with respect to matters such as related party transactions, and payment of dividend by an insurance company having majority foreign investment. However, the extent to which these conditions will be made applicable to insurance companies remains to be seen.
Once the foregoing norms are implemented, stakeholders in Indian insurance companies may choose to revisit existing arrangements with JV partners and/or other foreign investors. Additionally, Indian insurance companies may also need to revisit their governance structurers (including matters such as the composition of Board) in line with new requirements promulgated by the IRDAI.
Overall, the increase in FDI for insurance companies is a key development in times when new investments in the insurance space have been limited. However, it must be borne in mind that even with the notification of the 2021 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 2021 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/guidelines.
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