FDI in the Insurance Sector: Proposed Changes

Shubhangi Pathak (Partner) and Aishwarya Vats (Associate)

The Indian insurance sector has witnessed a plethora of changes in the last decade. The latest change proposed to be introduced to the insurance regulatory regime is increasing of the Foreign Direct Investment (“FDI”) limit in insurance companies from the current 74% to 100%. If approved by the Indian Parliament, this will mark a significant change from the previous FDI limit of 26%, which was increased to 49% by the Insurance Laws (Amendment) Act, 2015, and further increased to 74% in 2021.

While the FDI limit for part of the insurance sector, i.e., insurance intermediaries has been 100% (through the automatic route) for a number of years now, foreign investment in Indian insurance companies has been subject to not only a cap on the quantum of investment, but also more stringent regulatory norms. For instance, alongside, the notification of the Insurance Laws (Amendment) Act, 2015, the Guidelines on “Indian Owned and Controlled”, 2015 were introduced by the Insurance Regulatory and Development Authority of India (“IRDAI”) which imposed certain conditions on ‘Indian ownership’ and ‘Indian control’ of Indian insurers. These conditions were withdrawn with the increase in FDI limit from 49% to 74% through the Insurance (Amendment) Act, 2021, allowing foreign investors owing a majority stake in Indian insurance companies to exercise more control over such entities. However, this liberalization came with certain conditions as well. One such condition for Indian insurance companies having foreign investment was that the company shall ensure that the majority of its directors, key managerial persons and at least one among its Managing Director, Chief Executive Office and Chairperson of its Board shall be resident Indian citizens.

Further, even with the increase in FDI to the current cap of 74%, certain regulations are in place for providing norms in relation to investment in Indian insurance companies. For instance, the IRDAI (Registration of Indian Insurance Companies) Regulations, 2024, inter alia, provide norms in relation to the capital structure of insurers, lock-in requirements for promoters and investors of insurers, issuance of convertible instruments by insurers, nomination of directors on the board of directors of insurers, investment in the capacity of ‘promoter’ or ‘investor’ in an insurer and criteria for investment by private equity funds in Indian insurers. In addition, any change in the shareholding of an Indian insurance company beyond the specified thresholds also requires prior approval from the IRDAI.

Hence, while the regulations governing investment in Indian insurance companies have been revamped with the progressive increase in the FDI cap, investment by any person/entity in Indian insurers even today is governed by certain regulatory norms. The intent of the Indian insurance regulator has been to attract serious investors who are committed to the growth and development of the Indian insurance industry, aiming at deeper and wider insurance penetration in India. As insurers by the very nature of the business deal with policyholder funds, various facets of their operations, investments and capital structuring are governed by detailed regulations. This fact has also been recognised by the Indian lawmakers where the IRDAI has been entrusted with the responsibility of setting out detailed regulations on various aspects of the amendments introduced to the Insurance Act, 1938 over a period of time. In exercise of the power entrusted to them, the IRDAI has from time to time introduced and amended the rules and regulations in relation to investment in Indian insurance companies.

If the proposed amendment to the FDI limit in Indian insurance companies is passed and effected, it is bound to increase the inflow of foreign capital in the insurance sector. However, what remains to be seen is the manner in which the increase in FDI (once approved) will be implemented. Potential investors may wait to ascertain whether the insurance sector will be placed at par with other sector where FDI is uncapped and investment restrictions are minimal, if any, or will certain revised norms and restrictions be introduced by the IRDAI.

The IRDAI will be tasked with striking a delicate balance between regulating entities which deal with policyholder funds and permitting a more flexible framework to foreign investor who bring in capital and more developed and advanced business practices which would in turn facilitate increased insurance penetration in the country.