The liberalisation of foreign investment in the Indian insurance sector has been a subject of debate for more than a decade.
In her Budget speech of 1 February 2021, the minister of finance, Nirmala Sitharaman, announced that the foreign investment limit in the insurance sector is set to be increased from 49% to 74%, with some safeguards in relation to foreign ownership and control. In line with the Budget announcement, the Insurance (Amendment) Bill 2021 was introduced in the Rajya Sabha (the upper house of the Indian Parliament) on 15 March 2021, which passed the Amendment Bill on 18 March 2021. It received the President’s assent on 25 March 2021 and came into force on 1April 2021.
The Amendment Act seeks to raise the limit of foreign investment in an Indian insurance company from 49% to 74% and to allow foreign ownership and control with safeguards.
In her Budget speech, Ms Sitharaman proposed that certain safeguards will be included, such as a requirement that a majority of the directors and key managerial personnel of an insurance company are resident Indians and at least 50% of the board is comprised of independent directors.
She also proposed that there would be safeguards in relation to payment of dividends, as a specified percentage of profits will be required to be retained in the insurance company as a general reserve. The government is likely to prescribe the conditions and the manner of foreign investment in insurance companies.
Insurance sector after increase in FDI to 49% in 2015
In 2015, the sector was opened up substantially and the foreign direct investment (FDI) limit was increased from 26% to 49%.
At the same time, the government also introduced the ‘Indian Owned and Controlled’ requirement, which meant that the foreign investors could not exert control over significant polices of the company, and insurance companies would at all times be under the control of the Indian promoters.
Insurance sector post-2015
Since 2015, the sector has seen a significant rise in foreign investment, an influx of private equity funds, increased digitalisation and the establishment of new insurance companies, particularly in the general insurance space.
Insurance penetration in life insurance, which had been declining between 2009 and 2014, has since been exhibiting an upwards trend (from 2.60% to 2.82%) and insurance penetration in general insurance has risen from 0.70% to 0.94%. However, relative to the global insurance market, India remains severely underpenetrated.
A key to alleviating this deficiency lies in insurance companies scaling up and, because insurance is a capital-intensive business, it is necessary to supplement domestic capital with greater foreign investment.
Key amendments in 2021
The Amendment Act amends the Insurance Act 1938 and, inter alia, provides for:
- The substitution of sub-clause (b) in the definition of “Indian insurance company” in Section 2(7A) of the Insurance Act 1938, so as to raise the limit of foreign investment in the paid-up equity capital of an Indian insurance company from the existing 49% to 74%. Any foreign investment in an Indian insurance company will be in the manner and subject to such conditions as may be prescribed by the central government. It is currently unclear whether the ‘manner’ of foreign investment will only relate to pricing or whether the central government will also specify methods of increasing foreign investment, such as primary infusion of capital in the Indian insurance company as opposed to a secondary transfer.
- Omission of the explanation to Sub-section (7) of Section 27. Section 27 requires every insurer to invest and at all times keep invested a certain percentage of its assets, in the manner and subject to the conditions as specified in the section read with the relevant regulation (i.e. the IRDAI (Investment) Regulations, 2016). Sub-section (7) of Section 27 required that if the insurer is incorporated or domiciled outside India, such assets must be held in India in a trust and vested with trustees who must be residents of India and further, the instrument of trust be executed by such insurer with the approval of the IRDAI.
The explanation to Sub-section (7) of Section 27 extended the application of the said provision to an insurer incorporated in India in which at least: (a) one third of the share capital is owned by members domiciled elsewhere than in India; or (b) one third of the governing body consists of members domiciled elsewhere than in India. Given the proposal to permit foreign investment in Indian insurance companies up to 74%, the explanation to Sub-section (7) of Section 27 is proposed to be omitted.
- The substitution of Sub-clause (aaa) of Section 114(2), so as to give the central government the power to make rules in relation to the conditions and manner of foreign investment under Sub-clause (b) of Section 2(7a).
The Amendment Bill currently does not prescribe the conditions and manner that will have to be met in relation to foreign investment in insurance companies. With the substitution of Sub-clause (aaa) of section 114(2), the power to prescribe such conditions in relation to foreign investment is vested with the central government and once the Amendment is approved and enacted, the central government will notify the applicable rules in this regard.
The increase in FDI is a much-needed step in the right direction for of the Indian insurance industry. Increased levels of competition will in turn bring in novelty and innovation, while giving Indian consumers access to better insurance products at lower costs.
Much will depend on what conditions are finally prescribed, as the level of safeguards imposed on foreign investment will truly turn the decision of foreign investors in relation to increasing their investment in Indian insurance companies.
Contributed by Sumeet Lall, partner at CSL Chambers in New Delhi, an associate office of Clyde & Co