The Insurance Laws (Amendment) Ordinance 2014 (Ordinance) which was promulgated on 26th December 2014 brought about a slew of reforms to the legal framework governing India's insurance sector. While, the Ordinance remains a temporary law on date as it is yet to be passed by the Indian Parliament in the form of an 'Amendment Act', it is anticipated that the Insurance Regulatory and Development Authority of India (IRDAI) and the Central Government are likely to notify a number of new rules and regulations and amend existing provisions to implement various provisions of the Ordinance.

As one of the first steps aimed at implementing the changes in law introduced by the Ordinance, the Ministry of Finance, Government of India notified the Indian Insurance Companies (Foreign Investment) Rules 2015 (Rules) on 19th February 2015. The main features of the Rules are:

  • Insurers are not permitted to allow 'Total Foreign Investment' in their equity shares by foreign investors, including portfolio investors, to exceed 49% percent. 'Total Foreign Investment' has been defined to be the sum total of direct and indirect foreign investment by foreign investors, calculated in accordance with the IRDA (Registration of Indian Insurance Companies) Regulations 2000 read with ¶4.1.4 of the Consolidated FDI Policy issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India (FDI Policy). Please, however, note that ¶4.1.4 of the extant FDI Policy states that the methodology of determining direct and indirect foreign investment under the FDI Policy does not apply to the insurance sector which shall be governed by the relevant regulations.
  • Foreign direct investment of up to 26% of the total paid-up equity of an Insurer is allowed through the automatic route ie without the need for prior government approval.
  • Foreign direct investment proposals which take total foreign investment above 26% will need the approval of the Foreign Investment Promotion Board (FIPB).
  • Investment by Foreign Venture Capital Investors as permissible under the FEMA Regulations 2000 is also to be considered as foreign direct investment.
  • Insurers are required to ensure that ownership and control remains in the hands of resident Indian entities at all times.
  • The foreign equity investment cap of 49% also applies to insurance brokers, third-party administrators, surveyors and loss assessors and other insurance intermediaries appointed under the provisions of the Insurance Regulatory and Development Authority Act 1999.
  • Any increase of foreign investment in an Insurer has to be in accordance with the pricing guidelines specified by the Reserve Bank of India (RBI).
  • The Rules clarify that other aspects related to or flowing from matters related to foreign investment in Insurers which have not been dealt with by the Rules are to be regulated by regulations framed by the IRDAI.

The Rules are a step further in providing a mechanism for implementing the increase in foreign direct investment limit for the insurance sector. This change follows the amendment to §2(7A)(c) of the Insurance Act 1938 (as amended by the Ordinance) which increased the foreign investment limit (including portfolio investment) to 49% of the paid-up equity capital of an Indian insurance company which is Indian owned and controlled. The Rules provide some much awaited clarity in terms of the manner of increase in foreign investment in Insurers as well as insurance intermediaries. However, in order for the changes introduced by the Ordinance to be implemented completely, further clarification in the form of regulations and otherwise are awaited including:

  • Amendments to R11 of the IRDA (Registration of Indian Insurance Companies) Regulations 2000 to provide the exact manner of calculation of the permissible foreign investment limit of 49%;
  • Amendment of the FDI Policy to reflect the increased foreign investment limit;
  • Clarifications in terms of permitted foreign investment in corporate agents whose main business is not distribution of insurance products and that are not banks; and
  • Clarifications in terms of the permitted foreign investment in web aggregators, as they are presently not expressly listed as a separate category of insurance intermediary.

There is presently no indication of the likely timeframe for the issuance of these amendments/clarifications and until such time, complete implementation of the Rules may be difficult to achieve.

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