Pursuant to the promulgation of the Insurance Laws (Amendment) Ordinance, 2014 ("Ordinance"), the Ministry of Finance, Government of India has, by way of a notification dated 19 February, 2015 notified the Indian Insurance Companies (Foreign Investment) Rules, 2015 ("Foreign Investment Rules") to implement the decision of increase in the foreign investment limit in the insurance sector to 49%.

The Foreign Investment Rules will now have to be placed before each House of Parliament for thirty days. If both Houses modify the Foreign Investment Rules or agree that such Rules should not have effect or have effect only in a modified form then they will not have effect or have effect in such modified form. Since the ruling party has a majority in the Lower House of Parliament, it is unlikely that the Foreign Investment Rules will be amended by Parliament. However, the fate of the Foreign Investment Rules is linked to that of the Ordinance, which would have to be passed by both the Houses of Parliament in the forthcoming budget session. If the Government fails to have the Ordinance approved by Parliament within 6 weeks of its re-assembly, it would lapse. In such instance, the only option the Government would have would be to re-promulgate the Ordinance. Since, the Foreign Investment Rules have been made under the Ordinance, the Foreign Investment Rules will also cease to have effect unless the re-promulgated ordinance has a saving provision.

Nevertheless, the move of the Indian Government to notify the Foreign Investment Rules having come just ahead of the budget session of Parliament (starting 23 February, 2015) is indicative of the Government's resolve to have the Ordinance approved at such session.

Key updates on the Foreign Investment Rules are below.


  1. An Indian insurance company will be permitted to have 'Total Foreign Investment' of up to 49%. Such investment includes Foreign Direct Investment ("FDI") and investments by Foreign Institutional Investors and Foreign Portfolio Investors ("FII/FPI").

    For the purposes of the Foreign Investment Rules, FDI includes investment by Foreign Venture Capital Investors (FVCI).

    Notably, the Foreign Investment Rules now take into account FII investment as part of the FDI cap while FII investment was earlier excluded while computing the total foreign ownership (which then was 26%).
  2. FDI of up to 26% of the total paid up equity capital of an Indian insurance company will be allowed through the automatic route, i.e., without the prior permission of the Foreign Investment Promotion Board ("FIPB"). Any increase in the FDI stake beyond 26% to up to 49% will be subject to the approval of the FIPB1.
  3. "Ownership"2 and "Control" of an Indian insurance company will at all times have to be with resident Indian citizens or Indian companies, owned and controlled by resident Indian citizens.

    The Insurance Act, 1938 (as amended by the Ordinance) defines "Control" to include the right to appoint the majority of directors or to control the management or policy decisions, including by virtue of shareholding or management rights or shareholders' agreements or voting agreements.

    At present, there is no precedent on whether negative/veto rights would amount to "control". The Foreign Investment Rules also do not clarify the effect of Indian "control" which causes concerns particularly for existing joint ventures which allow veto rights to foreign promoters despite the 26% cap on foreign investment. Accordingly, the scope of "control" would be a key concern for any investor and it will be interesting to see how IRDA views "control" and whether it would consider minority protection/veto rights as constituting "control". It is common for joint venture agreements in insurance companies to grant affirmative voting/veto rights to non-resident shareholders holding a 26% stake.
  4. Any increase in foreign investment in an Indian insurance company will have to be in accordance with the pricing guidelines specified by the Reserve Bank of India under the Foreign Exchange Management Act, 1999.
  5. The foreign investment cap of 49% will also apply to insurance intermediaries such as insurance brokers, third party administrators, surveyors and loss assessors. Accordingly, foreign investment up to 26% in insurance intermediaries may be done under the automatic route and beyond 26% to up to 49%, with the prior approval of the FIPB.
  6. For insurance intermediaries such as banks, whose primary business is not in the insurance sector, the foreign equity investment caps applicable in the respective sector will continue to apply. Such insurance intermediaries would, however, be required to ensure that their revenues from their primary (i.e. non-insurance related) business remains above 50% of their total revenues in any financial year.


The Department of Economic Affairs, Ministry of Finance, has, by way of a Press Release ("Press Release") dated 17 February, 2015, launched a new upgraded and secure user friendly web site for filing and processing of applications for Foreign Direct Investment requiring Government approval.

Applications were earlier required to be filed at which had limited features and processing capabilities. Applications regarding FDI in approval route sectors would henceforth be received at the new website Applications were earlier required to be filed at which had limited features and processing capabilities. Applications regarding FDI in approval route sectors would henceforth be received at the new website


The IRDA has, by way of a circular ("Investment Circular") dated 16 February, 2015 clarified that until the approval of the amendments to the IRDA (Investment) Regulations, 2000 in accordance with the Ordinance, all investments made and kept invested by insurers under the existing Insurance Act, 1938 ("Insurance Act") would continue to be part of "Approved Investments".

The Investment Circular also clarifies that insurers must continue to apply fixed deposit and current deposit limit of 3% under the provisions of the existing Insurance Act for any one banking company.


IRDA had, by way of a circular dated 27 January, 2015 issued an Exposure Draft, Insurance Regulatory and Development Authority of India (Appointment of Insurance Agents) Regulations, 2015 ("Exposure Draft"), for stakeholder comments (if any, by 5 February, 2015). Key provisions of the exposure draft are as follows.

  1. Insurers must, inter alia, check whether a prospective agent has been black-listed before such agent is appointed.
  2. The exposure draft proposes to prohibit persons from taking out or renewing or continuing an insurance policy through a multilevel marketing scheme3.
  3. No individual will be permitted to act as an insurance agent for more than one life insurer, one general insurer, one health insurer.
  4. The IRDA has, under the Exposure Draft also set up a code of conduct for all insurance agents which inter alia, requires agents to sell as per customer's needs. Agents are also proposed to be required to bring to the notice of the insurer any adverse habits or income inconsistency of any prospect customer, in the form of a report called the "Insurance Agent's Confidential Report".


1 This is in addition to requirement of permission from the IRDA.

2 The Foreign Investment Rules define "Indian Ownership" of an Indian Insurance Company to mean more than 50% of the equity capital in such company being beneficially owned by resident Indian citizens or Indian companies, which are owned and controlled by resident Indian citizens.

3 "Multilevel Marketing Scheme" is defined as any scheme or programme or arrangement or plan (by whatever name called) for the purpose of soliciting and procuring insurance business through persons not authorized for the said purpose with or without consideration of whole or part of commissions or remuneration earned through such solicitation and procurement and includes enrolment of persons into a multilevel chain for the said purpose either directly or indirectly.

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