On 19 February 2015, the Department of Financial Services, Ministry of Finance, Government of India notified the Indian Insurance Companies (Foreign Investment) Rules, 2015 (Rules). The Rules seek to provide the framework for foreign investment in the insurance sector and will come into force from the date of its publication in the official gazette.
By way of a background, on 26 December 2014, the President of India (the President) promulgated the Insurance Laws (Amendment) Ordinance, 2014 (the Insurance Ordinance). The Insurance Ordinance, amongst other changes, increased the total foreign investment cap for insurance companies from 26% to 49%. Although, the Insurance Ordinance came into effect on 26 December 2014, owing to uncertainties around: (i) the continued effectiveness of the Insurance Ordinance; (ii) absence of corresponding changes to exchange control laws; and (iii) the underlying rules and regulations not having been notified by the Insurance Regulatory and Development Authority (IRDA), this policy liberalization has remained un-implementable. Some of these issues were covered in detail in our earlier newsflash of 31 December 2014 (please click here) and also our special edition of Ergo Perspective on the insurance sector (please click here).
In this Newsflash, we have provided a brief overview of the Rules.
Indian Insurance Companies (Foreign Investment) Rules, 2015
The Rules provide that the foreign equity investment cap of 49% is applicable to all Indian insurance companies, which cap includes the aggregate holdings by foreign investors. Indian insurance companies are also required to ensure that their ownership and control remain at all times with resident Indian citizens or Indian companies, which are owned and controlled by resident Indian citizens.
Other key provisions of the Rules are:
FIPB Approval: Foreign Direct Investment (FDI) upto 26% of the total paid-up equity of an Indian insurance company will be under the automatic route basis (i.e. without any prior approval requirement from Foreign Investment Promotion Board (FIPB)) and total foreign investment above 26% and upto the cap of 49% will require FIPB approval.
Pricing Guidelines: It has been clarified that any increase of foreign investment of an Indian insurance company has to be in accordance with the pricing guidelines specified by Reserve Bank of India.
Intermediaries: The foreign equity investment cap of 49% will also apply to insurance brokers, third party administrators, surveyors, loss assessors and other insurance intermediaries appointed under the provisions of the IRDA Act, 1999. However, the corresponding changes to the relevant regulations are yet to be notified.
The Rules are yet another step by the Government to operationalise the insurance reforms. With the budget session of the Parliament scheduled to commence from 23 February 2015, certainty on the way forward for foreign investment in the insurance sector can be expected in the next few weeks. With the Rules now notified, one can also expect to see the consequential amendments to the exchange control laws and introduction of corresponding rules and regulations by the IRDA in the near future.