The Ministry of Finance in May, 2021 notified an amendment to the existing Indian Insurance Companies (Foreign Investment) Rules, 2015 which mainly raised the foreign direct investment (FDI) in the insurance sector from 49% to 74%. Along with the increase in the investment limit the notified rules included several directions with regard to the FDI. The amendment was expected as the same was announced in the Union Budget by the Finance Minister, Nirmala Sitharaman.

The insurance companies and the sector are regulated by the Insurance Regulatory and Development Authority of India (IRDAI). The principal law governing this sector is the Insurance Act 1938, according to which the foreign investment in Indian insurance companies was permitted up to 49% of the paid-up equity capital. On the other hand 100% foreign investment is allowed in insurance intermediaries with certain restrictions. The Insurance Act also lays down that the insurance companies in the country should be owned and controlled by Indians. The new rules have brought a change in the level of investment but retained that the control should remain with Indian citizens.

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The new rules are applicable on all Indian insurance companies that have foreign investment irrespective of the percentage amount of the investment. The rules will have a retrospective effect as well and the insurance companies have been granted a one year time period to ensure compliance with the new rules. So what are the new rules introduced and how to ensure compliance?

The Rules that need to be kept in mind in compliance with 2021 Amendment Rules:

  1. 1. Restrictions on the following personnel has been imposed and the following can only be Resident Indian Citizens in an Indian insurance company having foreign investment:
  2. Majority of directors
  3. Majority of Key Management Person (KMP)
  4. At least one Chairperson of its Board; its Managing Director and its Chief Executive Officer. 

Basically, all the top managerial and administrative positions cannot be outsourced to nonresidents of the country.

  1. If the insurance company has more than 49 % FDI, then:
  2. General reserve amount to be kept has been notified as 50 % of the net profit if the dividend is being paid in equity shares for a financial year and the solvency margin is less than 1.2 times the control level of solvency.

A solvency margin is the minimum excess of assets over liabilities of an insurer or the difference between the value of an insurer’s assets and its liabilities. It is similar to capital adequacy requirements and is mandatory to be maintained. The solvency ratio / margin of an insurance company depends on the relative capital as compared to all the risks it has taken. In the current regime the Indian insurance companies having more than 49% foreign investment will require to keep around 180% solvency margin. IRDAI has laid down rules for determining the value of assets and liabilities for the purpose of calculating the solvency ratio.

  1. At least 50% of its directors should be independent directors and if the Chairperson of the Board is an independent director then at least one-third of its directors should be independent directors.

Several private insurance companies are set to benefit from these new rules.

The step taken with regards to raising the ceiling on FDI comes in the wake of India being categorized with one of the lowest insurance penetration level. As compared to a global average of 6.31%, India has 3.7% insurance penetration of Gross Domestic Product (GDP).

The pandemic has also made a long term dent on the spending patterns of the country directly affecting the GDP. The investment in the insurance sector and foreign investment as a whole has seen a major downfall during the pandemic in the country. Raising the FDI limit is one of the few actions necessary to invite investment. This is just the first step taken to rectify the situation and several other acts will have to be amended to bring the rules into full effect. Privatization of the existing government regulated insurance providers is also on the table and expected in the future.