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Insurance Companies (Foreign Investment) Amendment Rules 2021 – An Overview

Insurance Companies (Foreign Investment) Amendment Rules 2021 - An Overview
| Updated: Sep 03, 2021 | Category: IRDA Advisory

Recently the Finance Ministry of India issued the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2021, which amend detailed provisions of the Indian Insurance Companies (Foreign Investment) Rules, 2015 to clearly provide the rules that insurance companies with foreign investment should follow. But before we discuss this new amendment, let’s first understand the meaning of FDI and the role of IRDAI.

What is FDI?

FDI stands for Foreign Direct Investment is the investment made when the entity takes Authorityauthority or ownership of a business entity in another country. There is the direct participation of the foreign companies with the FDI for the regulation of the regular operations in another country. Generally, Foreign Direct Investment occurs when an investor develops foreign business activities or gets foreign business assets, like getting ownership or Authorityauthority of a foreign company. In open economies with skilled human resources and expansion potential, FDI is extensive. In India, FDI had rapidly increased when the economic liberalisation was initiated in the wake of the massive crisis in the year 1991. Today India is ranking number 1 in the Greenfield FDI globally.

For the past few years, in India, stakeholders in insurance firms have recommended an increase in the FDI, in line with the FDI maximum for the banking-the private sector. On February 01, 2021, the Finance Minister of India announced as a part of the National Budget Address for the F.Y 2021-22, that the FDI cap for Indian insurance companies would be increased from 49% to 74%.  Moreover, it was declared under the new framework that,

  • Most directors on the Board and key management personnel would have to be the Indian resident;
  • A definite percentage of the profit of the insurance company would have to be donated to the Government;
  • Foreign Authorityauthority and ownership would be permitted with protections;
  • 50% of directors would have to be independent directors.

IRDAI – Background

In 1950, the insurance industry of India was nationalised by the Indian Government, and LIC or Life Insurance Corporation was established. By taking the decision in the 1990s, the insurance sector was opened up to the private players. To establish the suggested reform, a committee was established and later, as a decision part of the committee, IRDAI was set up. When the market was opened in 2002, the stake limit which the foreign firms were permitted to buy was up to 26%, which later was capped at 49% by the Indian Government. Ultimately, in Budget 2020, the limit was increased up to 100%.

Insurance Regulatory & Development Authority of India is an independent and legal agency charged with managing and regulating India’s insurance industries and reinsurance industries. It includes a ten-member body comprising a chairperson, five full-time members and four part-time members. The primary role of IRDAI is to safeguard the insurance policyholder’s interests and ensure a fair result. IRDAI also has to keep a check that the interests of an ordinary person are not undermined by keeping an eye on the policy issuers. An increase of 11.36% was seen in collective premium income to Rs. 48.26 trillion at the time of Financial Year, which ended in March 2020.

Redrafting of the Indian Insurance Companies (Foreign Investment) Amendment Rules 2021

Indian Insurance Companies (Foreign Investment) Amendment Rules, 2021 provides us with the rules & regulations that have to be followed by all insurance companies having foreign investment. The new amended rules stated as:

  1. As per the Rule 2(o), the word “Resident Indian Citizen” should have the meaning accorded to it in any FDI strategy that the Government may prepare from time to time;
  2. According to the Rule 2(p), total foreign investment has been describing as the sum of the direct & indirect foreign investment by the foreign investor in such a company, which is estimated as per the manners that are suggested in the regulations made by the Authorityauthority concerning registration of all Indian insurance companies;
  3. According to Rule 4, most directors, senior management personnel, and at least one of the chairpersons of the Board, CEO, and managing director of Indian insurance business with foreign investment should be Indian citizens;
  4. Every Indian insurance company with overseas investment that existed on or before the begging of the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2021 should comply with the provisions mentioned as mentioned in sub-rule(1), within 1 year of such beginning;
  5. An Indian insurance company having overseas investment exceeding 49% for a Financial Year for which the dividend paid on equity shares & for which at any time the solvency margin is less than 1.2 times the level of control of solvency, not less than 50% of the total profit for the Financial Year shall be maintained in general reserve; and not less than 50% of its director, in which at least one-third of its Board shall include of independent directors as mentioned in Rule 4(a);
  6. According to Rule 5, 49% shall be substituted with 74%;
  7. According to Rule 8, for the letters “FEMA:, the words, figures, and brackets “FEMA Act, 1999 (42 of 1999)” shall be substituted.

Importance of Indian Insurance Companies (Foreign Investment) Amendment

  1. It’s good from the viewpoint of the promoters as they can keep control of the management & the Board and also the extra capital inflow generated would aid them with funds that will guide the country’s growth;
  2. It is of beneficial to the small insurance participants or the ones where the sponsors don’t have to put in much capital;
  3. As India has the minimum insurance penetration level worldwide, it will aid the local private insurers to grow & develop faster;
  4. The growth in foreign proprietorship to 74% could lead to the adoption of worldwide best practices in insurance products in the future. It would also help in the decrease of insurance product costs in India;
  5. Insurance Companies (Foreign Investment) Amendment will also aid in fortification and building healthy competition across the industry.

Insurance Penetration in India

Presently, insurance penetration in India is at 3.7% of the GDP as compared to the world’s average of 6.3%. The growth of the life insurance industry has decreased from 11% to 12% from 15% to the 20% till the Fiscal year 2020, as the Covid-19 pandemic has prompted clients to save money rather than invest in insurance plans or stock markets.

What is MIV?

The IRDAI[1] establishes Model Insurance Villages (MIV) to make the idea of insurance penetration in India and the benefits of insurance understandable in rural areas and encourage India’s insurance penetration. Financial help should be sought from NABARD (National Board for Rural Agricultural & Development), other institutions, Corporate Social Responsibility funds, reinsurance companies & government support to make the premium affordable. In the initial year, it will be performed in at least 500 villages across India, with an increase to 1000 villages in the following two years. For the steering of the concept, every general reinsurance & insurance company that accepts general insurance business & has operations in India should be involved.

Conclusion

Lucidity has been given with the introduction of the Insurance Companies (Foreign Investment) Amendment Rules, 2021, on the governance rules required by the entities having a foreign investment of more than 49%. These rules will also be appropriate to the private equity investments irrespective of whether it’s a direct investment or indirect investment according to the Insurance Companies (Foreign Investment) Amendment Rules, 2021. It is not clear that how insurance investments will be prepared in the future and whether the notification of the amending rules will prevent insurance companies & global investors from contemplating the private equity investment structure.

Moreover, changes to the framework are probable to match it with the revisions made by the amendment act & rules. Additionally, it is possible that the requirements for amendment rules will develop a change in the insurance business are examined, such as the impact of increased FDI on policyholders.

Read our article:General Insurance Business (Nationalisation) Amendment Bill, 2021

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A legal writing enthusiast, a wanderer, and a zealous reader. After gaining a lot of knowledge about the diverse legal topics and developing research skills, Karan joined the league of legal content writers to deliver quality-rich blogs.

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