Increased FDI cap for foreign direct investment in the insurance sector

The Ministry of Finance vide its notification S.O. 3411(E) dated August 19, 2021 issued the Foreign Exchange Management (Non-debt Instruments) (Second Amendment) Rules, 2021 (the “NDI Amendment Rules”) amending the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.
As per the latest NDI Amendment Rules:
1. Sectoral cap for foreign investment in the insurance sector has been increased from 49% to 74% of the total paid-up equity capital of the Indian insurance company under the automatic route. However, the same is subject to compliance with provisions of the Insurance Act,1938 and necessary licenses and approvals are required to be obtained from the Insurance Regulatory and Development Authority of India (“IRDAI”) for undertaking insurance and related activities in India.
2. Further, an Indian insurance company, receiving foreign investment(s) shall have the majority of its Directors, Key Managerial Personnel(s) (KMPs) and atleast one (1) among the Chairperson of the Board, the MD and the CEO, as an Indian resident citizen.
3. The NDI Amendment Rules also clarified that Indian insurance companies with foreign investment(s) are required to comply with the provisions under the Indian Insurance Companies (Foreign Investment) Rules, 2015, and applicable rules and regulations notified by the Department of Financial Services or IRDAI.
4. Lastly, applications for foreign direct investment in private banks which have a joint venture or a subsidiary in the insurance sector may be addressed to the Reserve Bank of India for consideration, in consultation with the IRDAI in order to ensure that the limit of 74% for foreign investment applicable to the insurance sector is not exceeded.
Our take: The increase in the sectoral cap for FDI in insurance companies, is expected to boost much needed liquidity in sector, which would improve the overall health of the books of insurance companies. This would allow companies to take leverage their position and improve market penetration, in a growing market like India. Additionally, the NDI Amendment Rules have brought in additional requirements in an attempt to balance the removal of the requirement mandating Indian insurance companies to be at all times, owned, managed and controlled by residents of India. The rules hereon require a majority of the directors, KMPs and at least one of the chairperson of the board/ MD/ CEO to be Indian resident citizens. Overall, these changes are expected to allow foreign investors to take on a more strategic and active role in the growth of the sector, rather than just as passive investors, and at the same time safeguard the interests of the promoters of Indian insurance companies.
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