Finance Minister Nirmala Sitharaman had, in her budget speech this year, proposed to increase the FDI limit in insurance companies to 100 per cent, with an added commitment to reviewing and simplifying the conditions associated with foreign investment. This was in keeping with the memorandum issued by the government in November 2024, on revamping the legislative framework for the Indian insurance sector through amendments to the regulatory framework.
While the budget proposal and the soft commitment made by the finance minister brought cheer to the insurance sector, only the awaited draft amendment bill to the Insurance Act and amendments to the Indian Insurance Companies (Foreign Investment) Rules, 2015, can provide more clarity on the likely contours of a fully liberalised insurance sector. In addition, given the current regime’s focus on international financial service centres, there may be additional benefits for insurance offices set up in such centres.
What stood out was the finance minister’s assertion that the 100 per cent FDI limit will be available to companies that invest the entire premium in India. Given that insurance companies are already restrained from investing policyholders’ funds outside India, the government must provide clarity on the intent and scope of this conditionality. Earlier, any increase in the FDI limit was accompanied by added conditions, dampening investor sentiment due to the impact on commercial feasibility.
Historical context
When the FDI limit was increased in 2015 from 26 per cent to 49 per cent, the stipulation was that all insurance companies should be “Indian-owned and controlled”. Foreign investors were required to dilute existing rights to comply with the requirement.
The “Indian ownership and control” criterion was withdrawn in 2021 with the FDI limit hiked from 49 per cent to 74 per cent. According to the existing regime, though majority ownership may vest with a foreign investor, most of the insurance company’s directors and key management persons (KMPs) must be resident Indian citizens. Moreover, at insurance companies with more than 49 per cent foreign investment, 50 per cent of the board must consist of independent directors. If, however, the chairman of the board is an independent director, then one-third of the board must consist of independent directors. Such conditions create practical challenges for foreign investors in managing large-sized boards.
Going by precedents it is certain that the proposed hike in FDI limit will be accompanied by conditions; however, it is also true that the finance minister’s specific direction makes it clear that the time for a liberal insurance sector has arrived.
In addition, the finance ministry has clarified in its FAQ to the budget that the FDI rules will be amended to include provisions for the appointment of KMPs and board composition, and thereby foster growth and a congenial environment in the sector.
Limit on intermediaries
When the FDI limit was increased to 100 per cent for insurance intermediaries in 2019, special conditions were imposed on intermediaries with majority foreign investment, including the stipulation that a majority of the directors and KMPs should be resident Indian citizens; the foreign investor was required to bring in the latest technology, as also managerial and other skills; prior approval of insurance regulator IRDAI was required to repatriate dividends; and related-party transactions were capped at 10 per cent of the total expenses in a financial year.
Despite liberalisation, such restrictive requirements dissuaded foreign investment in insurance intermediaries.
Striking a balance
The increase in FDI limit, along with the removal of the cooling-off period for registration of insurance companies under IRDA Regulations, 2024, could bolster the sector, leading to more FDI inflow by way of new entrants, including insurtech players, consolidation of existing joint ventures, and exits of foreign investors from current joint ventures with Indian promoters.
Though the government’s proposal is in the right direction, intending to make the sector more attractive to foreign players, the attached conditions will determine whether or not the stage is truly set to overhaul and completely liberalise the sector.
(The writer is partner, JSA Advocates & Solicitors)
