India's insurance sector is poised for a major transformation following the Finance Minister of India's February 1, 2025 announcement of a proposal to increase the FDI limit in the sector from 74% to 100%. This development presents opportunities for foreign investors in one of the world's fastest growing insurance markets.
The Indian insurance market has been growing at a strong pace over the last 20+ years, but the insurance penetration level is still only around 3-4% in India, as compared to approximately 7% in the rest of the world and an average of 13-15% in developed countries. This indicates a huge potential for further growth and innovation in the sector, especially as India's population, economy, and middle class expand.
India began allowing FDI in insurance in 2001 with a 26% cap, which was increased to 49% in 2015 and 74% in 2021. However, on top of these percentage FDI limits, foreign investment in the Indian insurance sector may cause a local company to be subject to certain governance or financial "guardrails" or "safeguards" (i.e., conditions) that are imposed by the Insurance Regulatory and Development Authority of India (IRDAI) if a foreign investor wants to invest above a certain ownership level. For example, foreign investment above 49% in an Indian insurance business (up to the 74% limit currently in place) may require that a company have a majority of independent directors on the board for the Indian business. In addition, senior executives of the Indian insurance business may be required to be resident Indian citizens, which restricts global investors from placing senior management with global experience within the Indian business. A greater than 49% stake also means an Indian insurance business can become subject to higher solvency requirements, thereby putting them at a competitive disadvantage.
The proposal to increase the FDI limit in insurance to 100% is subject to consultations and approvals by the Indian government including the IRDAI. Certain conditions are expected to apply to 100% FDI in insurance in the future, including the condition that all of the premiums from the Indian insurance business be invested in India (although dividends may be permitted to be sent out of India). However, the Indian Ministry of Finance is understood to be considering relaxing some of the above-mentioned "guardrails" or "safeguard" requirements on foreign investors in the hopes of attracting investment. From a corporate governance perspective, an increase in foreign ownership above the 75% ownership threshold would likewise relieve the owner from the minority protection provisions that apply to the company below that threshold. This would mean the investor could unilaterally approve actions that had previously been subject to minority influence, including amendments to charter documents, issuances of new shares, business combinations and restructuring, winding up and share buybacks.
The ability to wholly own an insurance or reinsurance business in India (whether though acquisition or setting up a subsidiary) will allow a great deal of flexibility to potential foreign investors without needing to enter into partnerships with locals, although such partnerships might still make strategic sense in certain cases for foreign investors looking to enter or grow the Indian insurance sector. If implemented, the proposal to increase the FDI limit in insurance to 100% could also potentially lead to a shake-up in the current joint venture relationships found in the Indian sector between existing foreign investors who entered the Indian insurance sector previously with local Indian partners as those foreign investors might seek to increase their ownership stake above the 74% ownership threshold up to 100% in order to secure greater control of the Indian subsidiary. Finally, it would allow potential Indian sellers of Indian insurance businesses to have a broader range of potential buyers to consider.
In the meantime, investing subject to the existing 74% insurance FDI cap remains the option for foreign investors as does the option to invest in India's new "special economic zone," called Gujarat International Finance Tec-City or GIFT City, which is intended to be India's first dedicated international financial services center. Foreign investors are able to set up entities in GIFT City to offer foreign currency denominated products, including insurance and reinsurance, to customers in India and abroad. To attract investors, GIFT City offers various incentives including tax and regulatory exemptions in India.
The proposed 100% FDI limit in India's insurance sector is a significant and welcome development for foreign investors who are interested in tapping into the enormous potential of the Indian market. However, the proposal is not yet final and may be subject to further changes and conditions as it progresses.
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