What 100% FDI Really Means Under India's Draft Foreign Investment Rules, 2025

1. Introduction

Under the draft Indian Insurance Companies (Foreign Investment) Amendment Rules, 2025, India proposes to move from the current 74% cap to allowing up to 100% foreign investment in Indian insurers subject to a strengthened governance and prudential framework. If finalised in their present form, the Rules would open the door for fully foreign‑owned insurers while still insisting on Indian regulatory control, resident key management, and enhanced corporate‑governance safeguards.

2. From 26% to 100% (Policy Background)

Foreign investment in Indian insurers has gradually liberalised from 26% under the original Insurance Act framework, to 49% in 2015, and to 74% in 2021, coupled with conditions on board composition, resident directors and profit retention. Budget 2025 and the Insurance Laws Amendment Bill, 2025 announced the government's intent to permit 100% FDI in Indian insurers, positioning it as a way to attract capital, deepen insurance penetration and spur product innovation.

The draft Indian Insurance Companies (Foreign Investment) Amendment Rules, 2025, issued by the Department of Financial Services in August 2025, operationalise this policy shift by amending the 2015 Foreign Investment Rules for Indian insurance companies. Commentaries by leading firms note that the draft retains the basic regulatory architecture of "Indian insurance company" status and Insurance Regulatory and Development Authority of India (IRDAI) oversight, while relaxing foreign‑ownership limits subject to a series of governance and prudential conditions.

3. What the Draft Rules Change on FDI?

3.1. Higher cap and ownership tests

The centrepiece of the draft is the removal of the statutory cap of 74% foreign shareholding in an Indian insurance company, enabling up to 100% foreign investment, whether under the automatic or approval route depending on the investor's profile. The Rules continue to require that the insurer remains incorporated in India and registered with IRDAI. They refine the definition of "foreign investment" to include direct and indirect holdings, as well as investments routed through intermediate holding companies.

Importantly, the draft preserves the concept of an "Indian insurance company" as one that is incorporated in India and compliant with prescribed governance conditions, rather than tying that status solely to majority Indian shareholding. This allows 100% foreign ownership while maintaining Indian regulatory and governance control through the board, management and prudential requirements.

3.2. Application to Life, General, Health, and Reinsurers

The amendments are drafted to apply across life, general, and stand‑alone health insurers and, in large part, to Indian‑incorporated reinsurers. However, some commentaries flag that IRDAI may issue parallel guidance for reinsurance entities. Foreign promoters contemplating entry or scale‑up can therefore consider both primary insurance and reinsurance licences under the 100% regime, subject to sector‑specific IRDAI regulations.

4. Board Composition and "Indian mind and management"

A central theme of the draft Rules is to safeguard Indian "mind and management" even when equity can be fully foreign‑owned.

Key governance requirements discussed in the draft and practice notes include:

1. Resident Indian directors: A minimum number of directors, including the chairperson or at least half the board, must be resident in India, to ensure local oversight and accountability.
2. Independent directors: For listed insurers and those above specified thresholds, the Rules interact with the Companies Act and SEBI norms on independent directors, reinforcing the need for a meaningful cohort of non‑executive, independent board members.
3. Indian‑resident key managerial personnel (KMP): The managing director/CEO, principal officer and key control function heads (risk, compliance, actuarial, internal audit) are expected to be resident in India, with IRDAI fit‑and‑proper oversight.

These measures are designed to address the concern that 100% foreign ownership could otherwise shift effective control of underwriting, risk and policyholder treatment outside India. For foreign promoters, they mean that governance design cannot be an afterthought. Board and senior‑management structures must be aligned with both the Companies Act and IRDAI expectations from the outset.

5. Prudential Safeguards (solvency, profit retention and capital flows)

The draft Rules and related policy statements also emphasise prudential soundness as a counterweight to higher FDI.

5.1. Solvency and retained earnings

Existing IRDAI regulations already prescribe minimum solvency margins, stress‑testing and capital‑adequacy norms for insurers. Earlier FDI increased to 74% introducing conditions requiring a portion of profits to be retained within the business for a set number of years. Commentaries expect similar or refined requirements to apply under the 100% regime, although the precise ratios may now be embedded in IRDAI regulations rather than in the FDI Rules themselves.

In practice, this means:

1. Newly capitalised insurers may be required to plough back a defined share of profits into reserves until solvency and track‑record thresholds are met.
2. Dividend distributions to foreign parents could be constrained in the early years, aligning shareholder returns with sustained policyholder protection and capital strength.

5.2. Restrictions on leverage and related‑party exposures

The foreign‑investment framework sits alongside IRDAI rules on investment, exposure limits and intra‑group transactions. The draft Rules implicitly assume that higher foreign ownership will not permit excessive leverage, upstream guarantees or related‑party investments that might weaken the insurer's balance sheet or transfer risk offshore in opaque ways. As a result, foreign investors will need to plan capital structures and intra‑group arrangements around IRDAI's conservative stance on solvency and ring‑fencing of policyholder funds.

6. Fit‑and‑Proper, Control and Regulatory oversight

The move to 100% FDI is accompanied by a stronger emphasis on fit‑and‑proper assessment and ongoing regulatory scrutiny.

6.1. Promoter and shareholder scrutiny

The draft Rules and accompanying commentary emphasize that IRDAI will retain and exercise robust powers to assess the fit‑and‑proper status of foreign promoters and significant shareholders, considering their global regulatory track record, financial strength, and governance culture. Changes in shareholding beyond specified thresholds, even within a foreign group, are expected to remain subject to IRDAI approval to prevent back‑door transfers of control.

6.2. "Control" in the insurance‑FDI context

Although general FDI policy and SEBI/CCI jurisprudence have their own tests for "control", the insurance‑FDI framework treats control through both equity and governance levers, including special rights, board appointment powers and vetoes. The draft Rules do not attempt a detailed redefinition. Still, practice notes highlight that IRDAI will continue to look at substance over form when assessing whether a foreign investor exercises control and whether that control is consistent with policyholder interests and systemic stability.

This reinforces the need to harmonise Articles of Association, shareholders' agreements and regulatory filings so that there is a coherent story on who controls the insurer and how oversight is exercised.

7. Market‑Entry Options and Restructuring under the New Regime

For foreign insurers and financial sponsors, the 100% FDI proposal presents multiple strategic options, but each is contingent upon by the governance and prudential safeguards discussed above.

7.1. New greenfield insurers

Global insurance groups that previously hesitated to enter India due to joint‑venture constraints can now consider wholly‑owned subsidiaries, designing governance structures that satisfy resident director, KMP and fit‑and‑proper expectations from day one. Capital planning must, however, factor in likely profit‑retention and solvency requirements, as well as the need to build distribution at scale in a competitive market.

7.2. Buy‑outs of Indian partners

Existing joint‑ventures where foreign shareholders already hold 49–74% can consider buying out Indian partners to increase their stake up to 100%, subject to IRDAI and other regulatory approvals. Such transactions will involve:

1. Valuation under applicable pricing guidelines;
2. Re‑negotiation of governance documents to reflect the new ownership pattern; and
3. Possible re‑assessment of distribution and bancassurance arrangements tied to the outgoing promoter group.

7.3. PE and financial‑sponsor participation

Private equity investors and financial sponsors may see opportunities in recapitalizing or consolidating smaller insurers, especially in health and specialized lines. However, the fit‑and‑proper and long‑term‑capital expectations flagged by IRDAI and in global industry feedback suggest that purely financial, short‑horizon investors may face closer scrutiny, especially where they seek control rather than minority stakes.

8. Policyholder Protection and Global Feedback

International industry bodies have broadly welcomed the liberalization but also highlighted the importance of proportional, risk‑based safeguards.

A 2025 submission by the Global Federation of Insurance Associations (GFIA) on the draft amendments notes that 100% FDI can support capital inflows, product innovation and better risk management, provided that governance requirements are applied in a predictable, non‑discriminatory manner and avoid unnecessary localisation of non‑critical functions. At the same time, GFIA and others acknowledge the legitimacy of Indian regulators' insistence on local accountability for core management, robust solvency oversight and clear resolution frameworks to protect policyholders.

Domestically, commentary emphasises that stronger foreign participation should not dilute social‑insurance and financial‑inclusion objectives that underpin many IRDAI initiatives. The balance struck by the draft Rules, permitting full foreign ownership while hard‑wiring Indian governance and prudential controls is explicitly aimed at reconciling these concerns.

9. Practical Takeaways for Boards, Investors and In‑house counsel

For boards of Indian insurers and potential foreign investors, the draft Rules are both an opportunity and a compliance project.

1. Strategic window: 100% FDI unlocks meaningful strategic play from new licences to buy‑outs, but only for groups willing to invest in governance, local management depth and long‑term capital.
2. Governance first, not last: Board composition, resident‑director ratios, independent directors and KMP residency will be gatekeeping issues in IRDAI approvals. Articles and shareholder documents should be drafted "regulator‑ready".
3. Capital and dividend planning: Profit‑retention expectations, solvency‑margin discipline and exposure limits mean promoters must adopt a cautious view of early dividends or aggressive leverage.
4. Documentation alignment: FDI approvals, IRDAI filings, Companies Act disclosures and contractual control rights must all tell a consistent story about who controls the insurer and how policyholder interests are safeguarded.

As the draft Indian Insurance Companies (Foreign Investment) Amendment Rules, 2025 move towards finalization, stakeholders should utilize the consultation window to address any practical frictions, while simultaneously preparing transaction structures and governance frameworks that can go live quickly once the 100% FDI regime is formally notified.

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.