Though the Insurance Laws (Amendment) Ordinance, 2014 (the Insurance Ordinance) effectively amended the Insurance Act, 1938, the issue faced by the shareholders of Indian insurance companies, was whether the Insurance Ordinance constituted an ‘effective change of law’ without the corresponding amendment being made to the Consolidated Foreign Direct Investment Policy, 2014 (FDI Policy).
This issue has now been resolved with the Indian Insurance Companies (Foreign Investment) Rules, 2015 (Rules) issued by the Department of Financial Services, Ministry of Finance, Government of India on 19 February 2015 (click here for our Newsflash dated 21 February 2015 on the Rules) and Press Note 3 issued yesterday by the Department of Industrial Policy and Promotion of the Ministry of Commerce and Industry, Government of India (DIPP).
This Ergo Newsflash sets out the key changes to the FDI Policy.
Press Note 3 is in line with the provisions set out under the Rules, which dealt with foreign investment in the insurance sector.
Key changes to the FDI Policy through Press Note 3 are set out below:
- Total foreign investment: Foreign investment limit in the insurance sector has been increased from 26% to 49%. This foreign investment cap includes aggregate investments made in the equity shares of an Indian insurance company under the following routes: Foreign Direct Investment, Foreign portfolio investment (FPIs), Foreign Venture Capital Investment, Depository Receipts and Non-Resident Indians.
- Route of Investment: Foreign investments upto 26% is permitted under the automatic route and investments beyond 26% upto 49% is permitted with the approval from the Foreign Investment Promotion Board.
- Ownership and Control: Ownership and control of the Indian insurance company should at all times remain with resident Indian entities, in the manner prescribed in the Rules. The Rules stipulate the following:
- Ownership: Beneficial ownership should remain with resident Indian citizens or Indian companies, which are owned and controlled by resident Indian citizens; and
- Control: Control should remain with resident Indian citizens or Indian companies, which are owned and controlled by resident Indian citizens. This change may affect existing Indian promoters of Indian insurance companies, who are classified as foreign owned and controlled under the FDI Policy.
- Pricing: It has been clarified that pricing guidelines stipulated by the Reserve Bank of India would be applicable for any increase of foreign investment in an Indian insurance company.
- Intermediaries: The foreign equity investment cap will also apply on the same terms to insurance brokers, third party administrators, surveyors, loss assessors, insurance consultants, corporate agents and other “insurance intermediaries” appointed under provisions of the Insurance Regulatory and Development Authority Act, 1999. However, corresponding changes to the relevant regulations governing the intermediaries are awaited.
It has also been clarified that if an entity like a bank, whose primary business is outside the insurance area, is functioning as an insurance intermediary, the foreign investment cap as above would continue to be applicable. Further, the revenues of such entities from their non-insurance related business is required to remain over 50% of their total revenues in any financial year.
With the Insurance Laws (Amendment) Bill slated to be introduced in the Lok Sabha (Lower House) of the Parliament in the coming Budget Session, the Rules and amendment to the FDI Policy seem to stem from the confidence that the Government would pass the relevant legislation in the coming days. While clarity on many aspects is welcome, certain challenges still remain for Indian insurance companies in implementation of the requirements under the Rules and the FDI Policy.