Introduction

The Central Government has notified the Foreign Exchange Management (Non-debt Instruments) (Second Amendment) Rules, 2020 (Amendment Rules) with effect from 27 April 2020.

The key change introduced pursuant to this Amendment Rules is the increase in the foreign equity investment limit in insurance intermediaries (such as insurance brokers, re-insurance brokers, insurance consultants, corporate agents, third party administrator, surveyors and loss assessors) from 49% to 100%.

Background

The Finance Minister, Nirmala Sitharaman, in the 2019 Union Budget had announced that the Government would allow 100% foreign investment for insurance intermediaries.

Subsequently, the Central Government had issued the Indian Insurance Companies (Foreign Investment) Amendment Rules 2019 to amend the Indian Insurance Companies (Foreign Investment) Rules, 2015. The amendment removed the cap on foreign equity investment for insurance intermediaries. While the Indian Insurance Companies (Foreign Investment) Rules, 2015 were amended to remove the cap on foreign investment, no corresponding change was made to the foreign exchange management regulations.

Amendment Rules

The Amendment Rules have, in addition to increasing the cap on foreign investment for insurance intermediaries, also replaced the existing conditions that were applicable to insurance companies and insurance intermediaries with the following new conditions:

  1. foreign investment in insurance companies will continue to be capped at 49% of the paid-up equity capital and such investments will be under the automatic route and subject to the regulations of the insurance regulator i.e., IRDAI;
  2. the ownership and control of an insurance company will have to be with Indian residents;
  3. foreign portfolio investment in an Indian insurance company and insurance intermediaries will be governed by the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 and the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules);
  4. the pricing guidelines specified in the NDI Rules will be applicable to any increase in foreign investment in Indian insurance companies or insurance intermediaries;
  5. the composition of the board of directors and key management persons of insurance intermediaries will be as specified by the IRDAI;
  6. in case of entities (such as banks) whose primary business is outside the insurance area but are permitted to function as an insurance intermediary, the foreign equity investment cap as applicable to that sector will continue to apply. However, the revenues of such entities from their primary (non-insurance related) business must remain above 50% of their total revenues in any financial year; and
  7. an insurance intermediary with a majority shareholding of foreign investors will need to comply with the following conditions:
    1. the insurance intermediary should be incorporated as a limited company under the Companies Act, 2013;
    2. at least one from among the chairman of the board of directors or the chief executive officer or principal officer or managing director of the insurance intermediary must be a resident Indian citizen;
    3. it has to take permission of IRDAI for repatriating dividend;
    4. it has to bring in the latest technological, managerial and other skills;
    5. it cannot make payments to the foreign group, promoter, subsidiary, interconnected or associate entities beyond what is necessary or permitted by IRDAI;
    6. it has to make disclosures of all payments made to its group, promoter, subsidiary, interconnected or associate entities in a format specified by IRDAI; and
    7. the composition of the board of directors and key management persons of the insurance intermediaries shall be as specified by the concerned regulators.

Conclusion

This is indeed a welcome move and is expected to bring more foreign direct investment into the country. This decision is also likely to provide insurance intermediaries in India with access to the latest technological innovations and global best practices and to thereby increase the quality of the insurance intermediary services currently available to the Indian consumer. We are also hopeful that the impact of the Amendment Rules on the Indian insurance business in general will be significant which in turn will pave the way for a similar increase in the current foreign investment cap in insurance companies.

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