Relaxation of foreign investment limits for insurance intermediaries was a subject of much debate over a period of time with many industry participants eagerly awaiting relaxation of FDI limits and withdrawal of norms on Indian ownership and control. Various stakeholders, including industry participants advocated in favour of increase of foreign investment permitted in the insurance sector as many believed that this would help in bringing in more technical expertise and funding in the insurance intermediary space. On 2 September 2019, the IRDAI notified the Indian Insurance Companies (Foreign Investment) Amendment Rules 2019 (Amendment Rules) effectively allowing 100% FDI in insurance intermediaries1. Pursuant to the Amendment Rules, the IRDAI notified the IRDAI (Insurance Intermediaries) (Amendment) Regulations 2019, which introduced amendments in the regulations governing insurance intermediaries in line with the Amendment Rules2. The IRDAI also issued the circular on "Withdrawal of Indian owned and controlled condition for insurance intermediaries" of 19 November 2019 to withdraw the norms on Indian ownership and control, as applicable to insurance intermediaries, thereby paving the path for wholly owned subsidiaries of foreign entities to be set up in India.
However, despite the relaxations introduced, insurance intermediation remains a regulated activity, and all insurance intermediaries must continue to comply with regulatory norms on setting up and operation of insurance distribution business. With the intent to regulate repatriation of dividend by insurance intermediaries having majority foreign investment, the IRDAI has further notified the "Guidelines on Repatriation of Dividend by Insurance Intermediaries having majority by foreign investors" of 3 January 2020 (Repatriation Guidelines). Additionally, the IRDAI has also notified a circular titled "Foreign Investment in insurance intermediaries" of 18 May 2020 (Undertaking Circular) mandating submission of an undertaking by insurance intermediaries.
Repatriation Guidelines – Key Highlights
Rule 9(3) of the Indian Insurance Companies (Foreign Investment) Rules 2015 (as amended) stipulates that an insurance intermediary having majority shareholding of foreign investors is required to obtain prior permission of the IRDAI for repatriating dividend. The Repatriation Guidelines prescribe the process, format and timelines for filing and disposal of such applications. In addition, the Repatriation Guidelines stipulate inter alia, the following additional norms to be followed by insurance intermediaries having majority shareholding of foreign investors for repatriation of dividend:
- The insurance intermediary is required to have a net-worth of 1.5 times of the statutorily required minimum paid-up capital after the proposed dividend payout;
- The dividend payout is required to be paid out of the insurance intermediaries' current year's profit. Also, the IRDAI should not have placed any restriction on the insurance intermediary for declaration of dividends;
- The dividend pay-out ratio calculated as a percentage of dividend payable in year to profit after tax during the tax should not exceed 75%;
- The financial statements pertaining to the financial year for which the dividend is declared are required to be free of any qualifications by the statutory auditors, which have an adverse bearing on the profit during that year.
The IRDAI has directed all the insurance intermediaries to submit an undertaking confirming compliance with: a) Press Note 3 of 17 April 2020 (Press Note) which stipulates that any entity of a country sharing land border with India can invest in India only after obtaining the approval of the government; and b) the Foreign Exchange Management (Non-Debt Instruments) (Second Amendment) Rules 2020 (NDI Amendment Rules) which amend the Foreign Exchange Management (Non-Debt Instruments) Rules 2019 in line with the Amendment Rules.
The Undertaking Circular further stipulates that insurance intermediaries are required to ensure that the undertaking is duly signed by the Principal Officer/Compliance Officer, and accompanied with a certified copy of board resolution confirming compliance with the Press Note and the NDI Amendment Rules. Further, insurance intermediaries are required to obtain necessary government approval with respect to compliance of Press Note, wherever applicable. However, it is relevant to note that the IRDAI is yet to prescribe any timeline for submission of this undertaking. Further, it is unclear whether this undertaking has to be submitted by all insurance intermediaries as a one-time compliance or, at the time of obtaining approval for change in shareholding of the insurance intermediary entity.
100% FDI in the insurance intermediary sector is a welcome change. However, the IRDAI has issued considerable norms with respect to management and functioning of such insurance intermediaries having majority shareholding of foreign investors. Foreign investors will therefore need to be alive to these norms, when deciding to invest in insurance intermediaries in India. It remains to be seen how the market participants and the global insurance players react to the introduction of additional regulatory obligations for foreign investment in insurance intermediaries.
As stated above, it is still unclear whether the undertaking of compliance with FDI norms has to be submitted by all insurance intermediaries as a one-time compliance or, at the time of obtaining approval for change in shareholding of the insurance intermediary entity. Furthermore, the applicability of the additional norms, introduced for insurance intermediaries with majority foreign investment, such as appointment of resident director, repatriation of dividend, etc, in relation to corporate agents (whose primary business is other than insurance intermediation and who earn less than 50% of their revenue from insurance intermediation), has not been expressly clarified. It must be noted that such corporate agents are not bound by the FDI limits applicable to the insurance sector per the extant RBI norms on foreign investment and hence the justification for applicability of additional IRDAI norms on such entities remains unclear. Clarity on applicability of norms and timelines for compliance, will help boost confidence of foreign investors looking to invest in insurance intermediaries in India.
1. For a detailed update, please refer to our article titled "100% FDI in Insurance Intermediaries – A Welcome Change" Mondaq, 3 October 2019 https://www.mondaq.com/india/insurance-laws-and-products/850494/100-fdi-in-insurance-intermediaries-a-welcome-change (Last accessed on 3 July 2020).
2. For a detailed update, please refer to our article titled "FDI in Insurance Intermediaries – An Update" Mondaq, 28 November 2019 https://www.mondaq.com/india/insurance-laws-and-products/869080/fdi-in-insurance-intermediaries-an-update (Last accessed on 3 July 2020).
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