The long awaited amendment to the Insurance Act, 1938 (Insurance Act) is one step closer to becoming a reality. The proposed amendment includes the increase of foreign investment ceiling in insurance companies from the present 26% to 49%. The recent journey of the Insurance Laws (Amendment) Bill, 2008 (Insurance Bill) has been as follows:
- The Insurance Bill was last introduced in the Parliament in July of this year. However, owing to certain concerns raised, it was referred to a select committee for reconsideration.
- On 10 December 2014, the select committee submitted its report to the upper house of Parliament and recommended some additional changes. On the same day, the Union Cabinet approved the official amendments to the Insurance Bill and its introduction in the parliament.
- The Insurance Bill is expected to be introduced in the Parliament anytime now for consideration and passage.
Below are some of the key changes which were proposed in the Insurance Bill and also some new recommendations of the select committee.
Changes proposed in the Insurance Bill
- Increase of foreign investment cap in insurance companies from 26% to 49% but ownership and control to remain with Indian residents.
- Foreign re-insurers to be allowed to engage in re-insurance business in India through branch offices.
- Insurance companies be permitted to raise new capital through instruments other than equity shares.
- Waiving the requirement for promoters of insurance companies to divest shareholding in excess of the prescribed limit.
- Recognition of ‘health insurance’ as an exclusive field of insurance business and carving it out from the umbrella of general insurance.
- Other amendments such as removal of the requirement on insurance companies to maintain certain deposits with Reserve Bank of India, creation of appellate body and inclusion of insurance agent in the definition of ‘insurance intermediaries’.
Recommendations of the Select Committee
- 49% limit available for foreign shareholding to include all forms of foreign investments including those of foreign portfolio investors.
- Insurance companies to be owned and controlled by Indian residents in the prescribed manner. Further, ‘control’ has been defined in line with the definition of ‘control’ under the Foreign Direct Investment Policy to include the ‘right to appoint majority of directors or to control management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.’
- The Central Government to be empowered to make rules relating to the manner of ownership and control of insurance companies.
- Other changes such as (i) widening the definition of ‘health insurance business’ to include in-patient or out-patient travel cover and personal accident cover; (ii) increasing the minimum paid up equity capital threshold for health insurance business to INR 100,00,00,000 (the Insurance Bill provided a threshold of INR 50,00,00,000); (iii) Insurance Regulatory and Development Authority (IRDA) to prescribe the broad framework for determination of management expenses of insurers (Insurance Bill had proposed a cap on the management expenses); (iv) restrictions on sale of insurance products through multilevel marketing scheme; (v) additional qualifications for a person to be able to act as surveyor or loss assessor in respect of general insurance business.
- The select committee also observed that ‘the incremental equity (coming in through increase in cap on foreign investment) should ideally be used for expansion of capital base so as to actually strengthen the insurance sector’. This would imply a limitation on insurance companies to be able to induct foreign investors only through primary issuance (and not by secondary sale of shares from existing shareholders). However, a provision to this effect was not suggested by the select committee in the actual text of the amendments proposed by them.
This is an eagerly awaited reform which has the potential to contribute to the growth of the Indian insurance sector. In addition to the growth of the existing insurance companies, the development would also attract new companies in this business. Given the amendments proposed, following are some of the issues which will need careful consideration while structuring new deals once these amendments are introduced:
- A foreign shareholder with shareholding upto 49% would expect some degree of control in the company and also some safeguards to protect his investment. The much debated topic of what constitutes control would take centre stage.
- Inclusion of portfolio investments within the aggregate threshold of 49% could make listing of insurance companies less attractive, particularly in situations, where a foreign shareholder already holds 49% of the company and doesn’t want to dilute in the public offer. In such situation, no headroom would be available for new foreign investors in the initial public offer.