In December last year, the Indian government raised the FDI limit in the insurance sector from 26% to 49%. This was done through the introduction of the Insurance Laws (Amendment) Act, 2015, the Indian Insurance Companies (Foreign Investment) Rules, 2015 ("Foreign Investment Rules") and by undertaking amendments to paragraph of the Consolidated FDI Policy dated 12 May 2015.

Rule 3 of the Foreign Investment Rules restricts foreign shareholding (directly or indirectly) to a maximum of 49% (i.e., Indian owned), and Rule 4 further mandates that an Indian Insurance company be Indian controlled. In addition to the requirement of being Indian owned and controlled, Regulation 11 of the Insurance Regulatory and Development Authority (Registration of Indian Insurance Companies) Regulations, 2000 ("Registration Regulations") prescribes the computation methodology for calculating foreign shareholding in an Indian Insurance Company. It is interesting to note that this computation methodology differs from the methodologies applied to other industries / activities under the FDI policy.

As a result, under the current regime, the standard entry route into the insurance business in India for a foreign player seems restricted to setting up or investing in an Indian owned and controlled entity in which its shareholding is limited to a maximum of 49%. These revised FDI caps and computation methodologies also apply to insurance intermediaries.

Interestingly though, for foreign players seeking to make a greater investment in such a business (and enjoy corresponding benefits, such as control, centralised holding etc.), there may be other permissible structures.

Rule 9 of the Foreign Investment Rules extends the 49% cap 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.However, the proviso to Rule 9 reads: "Provided that where an entity like a Bank, whose primary business is outside the insurance area, is allowed by the Authority to function as an insurance intermediary, the foreign equity investment caps applicable in that sector shall continue to apply, subject to the condition that the revenues of such entities from their primary (i.e. non-insurance related) business must remain above 50 per cent of their total revenues in any financial year." (Emphasis supplied).

Given that the phrasing of the proviso to the Rule uses 'like a Bank', it is plausible that the benefit of the proviso is not restricted only to banks, but extends to all entities whose 'primary business is outside the insurance area'. As long as the entity in question operates outside the insurance business, and the revenues from its primary (non-insurance) business account for more than 50% of its total revenues (post undertaking the insurance business), it may continue to avail of the potentially higher foreign investment cap applicable to the sector of its primary business.

The proviso then seems to permit a situation in which foreign players may enjoy significantly larger investment limits by using an entity, currently operating in a sector which enjoys a 100% FDI cap (such as e-commerce activities), to set up an insurance business or operate it as an insurance intermediary (subject to compliance with applicable insurance regulatory requirements and approval from the Insurance Regulatory and Development Authority).

The elbow room afforded by the usage of 'like a bank', whose 'primary business is outside the insurance area' in the proviso, creates potential for the use of unconventional structures, allowing foreign players to use existing entities operating in sectors with greater investment caps to engage in insurance business as well.

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