Around noon on Friday, July 4th, 2019, the Hon'ble Minister of Finance, in her budget speech to the nation, proposed revisions to the existing foreign investment caps applicable to insurance brokers and other insurance intermediaries in order to allow 100% foreign direct investment ("FDI"). This move was long overdue on the government's part, particularly in relation to insurance brokers. In fact, a proposal for liberalising foreign investment caps for insurance brokers has been on the drafting table of the Government of India for close to two years now. In the past, a number of representations had also been made by market participants to the various departments of the government highlighting the need to differentiate foreign investment norms for insurance brokers and insurance companies, and to not treat insurance brokers in parity with insurance companies, in so far as foreign investment is concerned1.
In the authors' view, foreign investment in insurance brokers cannot be treated on the same pedestal as foreign investment in insurance companies. Indian insurance companies play a major role towards maintaining financial stability of the Indian markets. For this purpose insurance companies are required by law to maintain a minimum amount of financial solvency. Hence, retaining Indian ownership and control by capping foreign investment at 49% has been considered essential. However, this does not hold true for insurance brokers. Firstly, unlike insurance companies, insurance brokers are not entrusted with management of public wealth and secondly, insurance brokers can be setup as privately held entities with minimum statutorily prescribed capital. In light of this, the liberalisation of foreign investment in insurance brokers, though long overdue, is well justified.
We now await the final notifications from the Government of India for enforcing the liberalised regime. In order to give full effect to the government's decision, the following changes would be required to the Indian legal framework applicable to foreign investments in Indian insurance brokers:
- The consolidated FDI Policy Circular of 2017 ("FDI Policy"), issued by DIPP, currently provides that FDI for insurance brokers is allowed up to 49%. An amendment to the FDI Policy would need to be issued stating that the FDI cap of 49% is no longer applicable to insurance brokers. In order to reflect the change in the FDI Policy, an amendment by the RBI to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 would also be required.
- Rule 9 of the Indian Insurance Companies (Foreign Investment) Rules, 2015 ("Foreign Investment Rules") currently specifies that the foreign equity investment cap of 49% shall apply to inter alia insurance brokers. The Department of Financial Services, Ministry of Finance, Government of India, would need to issue an amendment to Rule 9 of the Foreign Investment Rules, to exempt insurance brokers from the 49% FDI cap.
- The guidelines on "Indian Owned and Controlled" dated October 19, 2015, together with the "Guidelines on Indian Owned and Controlled for Insurance Intermediaries" dated November 20, 2015 (together, the "Control Guidelines"), each issued by Insurance Regulatory & Development Authority of India ("IRDAI"), require compliance by insurance brokers and, when read in conjunction with the Foreign Investment Rules, currently impose an FDI cap of 49% on the insurance brokers. In order to exempt insurance brokers from the purview of the Control Guidelines, the IRDAI would need to amend the Control Guidelines.
It would be pertinent to note that Regulation 19(5) of the IRDAI (Insurance Broker) Regulations, 2018 ("Broker Regulations"), issued by IRDAI, currently provides that the aggregate holdings of equity shares or contribution by foreign investors, including portfolio investors, shall be as prescribed by the Central Government from time to time. Hence, no amendment to the Broker Regulations shall be required to increase the FDI cap to 100%. Further, the Insurance Act, 1938 also does not specify any FDI limits for insurance brokers.
Once the above changes come into effect, alongside fresh capital, the sector can look forward to the creation of new jobs, greater sharing of know how, technical innovation and global best practices. Better brokers means better access to insurance products, which has been the need of the hour for the Indian public and the Indian economy. Overall, we expect this step to be a shot in the arm, not only to the insurance sector, but to the individuals and industries it serves.
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