Foreign Direct Investment in Indian Insurance Sector
The Insurance Laws (Amendment Bill) 2015 (the “Insurance Bill”) has now been passed by both houses of Parliament in India. The Insurance Bill will become effective as an Act of Parliament once it is signed by the President of India and published in the official gazette. There is no fixed time period for completing this signing/publication process but we expect this to be done fairly quickly. The Insurance Bill replaces the Insurance Laws (Amendment) Ordinance 2014 (the “Insurance Ordinance”) which came into effect on 26 December 2014, and was always meant to be a stop-gap measure.
The Ministry of Finance also issued the Indian Insurance Companies (Foreign Investment) Rules, 2015 (the “Rules”) on 19 February 2015, which seeks to clarify the concept of Indian ownership and control – there are still some inconsistencies, but we expect those to be resolved soon with the passing of the Insurance Bill.
Key Changes Introduced
- Total foreign investment limit – the total foreign investment limit in the insurance sector has been raised from 26% to 49%. This cap includes all forms of foreign investment including foreign direct investment, foreign portfolio investment, depositary receipts and non-resident Indians.
- Regulatory Approvals –
- FIPB: Investment of up to 26% is permitted under the “automatic route”. Any investment above 26% but up to 49% requires the prior approval of the Foreign Investment Promotion Board; and
- IRDA: As per the existing law, any sale of shares over 1% of the total equity share capital and purchase of more than 5% of the total equity share capital, required the prior approval of the Insurance Regulatory and Development Authority (the “IRDA”).
Pricing: Any increase in the foreign investment in an Indian insurance company would have to comply with the pricing guidelines specified by the Reserve Bank of India.
- Ownership and control – Ownership and control of Indian insurance companies must remain with Indian entities. This has been specifically clarified in the Rules as:
- Ownership – at least 50% of the equity ownership should be beneficially held by Indian citizens, or Indian companies, which are owned and controlled by Indian citizens.
- Control – control should be with Indian citizens, or Indian companies, which are owned and controlled by Indian citizens.
However, neither the Insurance Bill nor the Rules provides any more detail around what would amount to “control”, and particularly, whether ‘reserved’ or ‘veto’ rights granted to foreign investors under their joint venture/shareholders’ agreements with Indian partners will be considered for determining control of Indian insurance companies. As an increase in FDI from 26% up to 49% requires prior approval from the Foreign Investment Promotion Board (FIPB), we assume that compliance with control related requirements will be considered on a case to case basis.
- New Investment Instruments – Up till now, Indian insurance companies were permitted to raise financing only through equity. The Insurance Bill now permits Indian insurance companies to raise capital through financial instruments other than equity shares. Details of the permitted instruments will be subject to a separate notification to be issued by the IRDA.
- Reinsurance – Foreign reinsurance companies are now permitted to undertake re-insurance business in India directly through the establishment of a branch in India and registration of the branch with the IRDA.
After almost 7 years of waiting, the much awaited liberalisation of the Indian insurance sector has been effected. The passing of the Insurance Bill has also ended the uncertainty around the enforceability of the Insurance Ordinance. In addition to the increase in FDI limits, the ability to raise financing other than by equity and the opening up of the re-insurance market are all positive signs that we see leading to further investment in the insurance sector in India.