The Upper House of the Indian Parliament has passed the Insurance Laws (Amendment) Bill, 2015 (Insurance Bill) today. With this, the Insurance Bill now stands passed by both houses of the Indian Parliament. The Insurance Bill would now require Presidential assent and publication in the official gazette of India to become effective. We expect these procedural steps to be completed in the next few days. Amongst other changes, the Insurance Bill provides for the increase of foreign investment ceiling in Indian insurance companies from 26% to 49% and replaces the Insurance Laws (Amendment) Ordinance, 2014 (Insurance Ordinance), which came into effect on 26 December 2014.
Insurance M&A - Quick snapshot of key changes introduced
- Total foreign investment limit: 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.
- New Instruments permitted: Insurance companies are permitted to raise capital through instruments other than equity shares. Instruments would be specified through separate regulations by the Insurance Regulatory and Development Authority of India (IRDA). However, the voting rights of shareholders are restricted only to equity shares.
- Route of Investment: Foreign investments up to 26% are permitted under the automatic route and investments beyond 26% up to 49% are permitted with the approval from the Foreign Investment Promotion Board.
- IRDA Approval: Earlier provisions in relation to IRDA approval for change of shareholding have been retained. Sale of shares over 1% of the total equity share capital and purchase of shares resulting in total equity share capital of more than 5%, requires the prior approval of the IRDA.
- Ownership and Control: Ownership and control of the Indian insurance company should at all times remain with resident Indian entities. Things to note are:
- 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.
- Pricing: Pricing guidelines stipulated by the Reserve Bank of India would be applicable for any increase of foreign investment in an Indian insurance company.
- Reinsurance: Foreign reinsurance companies are allowed to engage in re-insurance business in India directly through branch offices pursuant to registration with IRDA.
This is a much awaited development and ends the uncertainty around continued enforceability of the Insurance Ordinance. We expect several existing foreign shareholders to increase their stake in Indian insurance companies. This development is also expected to see entry of new players in the Indian insurance and reinsurance sector and interest from global private equity funds, sovereign wealth funds and other institutional investors.