Introduction

Following the announcement of the increase in the foreign investment ceiling in Indian insurance companies from 49% to 74% in the central budget speech for the financial year 2021-22 (Budget Speech), the Insurance (Amendment) Act of 2021 (2021 Amendment) was notified with effect from 1 April 20211.

Pursuant to this, the Ministry of Finance recently issued the Indian Insurance Companies (Foreign Investment) Amendment Rules 2021 (Amendment Rules) on 19 May 2021 which amend specific provisions of the Indian Insurance Companies (Foreign Investment) Rules 2015 (2015 Rules) to expressly provide the norms which will have to be followed by insurance companies having foreign investment.

The highlights of the Amendment Rules are below.

Highlights

  1. Per the Amendment Rules, an Insurer having foreign investment must ensure that the majority of Directors on its Board; the majority of its key management persons; and at least one among the Chairperson, Managing Director and Chief Executive Officer, are 'Resident Indian Citizens'. Every existing Indian Insurer having foreign investment must comply with this condition within a period of 1 year from the date of commencement of the Amendment Rules.
  2. In addition to the above, Insurers having foreign investment exceeding 49% must also ensure that:
    1. At least 50% of the directors on the Board of the company are independent directors. However, in the event the Chairperson of the Board is an independent director, one-third of the Board of the Insurer shall be required to be comprised of independent directors;
    2. In a financial year in which dividend is paid on equity shares and in which at any time the solvency margin is less than 1.2 times the control level of solvency, not less than 50% of the net profit for the financial year shall be retained in general reserve. .
  3. Further, to avoid any discrepancies and ensure harmony with the 2021 Amendment, the following clauses from Rule 2 (definitions) have been omitted:
    1. Control;
    2. FIPB – Foreign Investment Promotion Board;
    3. Indian Control of an Indian Insurance Company; and
    4. Indian Ownership.
  4. Furthermore, in conformity with 2021 Amendment, the Amendment Rules replace references to 'forty-nine' percent with 'seventy-four' percent.

Concluding Remarks

The Amendment Rules provide clarity on the norms on governance required to be followed by insurance companies having foreign investment of more than 49%. It follows that foreign investors looking to invest in the Indian insurance sector or to increase their existing investments in the Indian insurance sector will have to consider the requirement to now have resident Indian citizens comprising the majority as well as have at least half the Board constituted of independent directors.

The norms applicable to insurance companies having majority foreign investment, as prescribed under the Amendment Rules may to an extent be compared with the norms as stipulated under the IRDAI (Investment by Private Equity Funds in Indian Insurance Companies) Guidelines 2017, which allow for PE Funds to become investors or promoter to an Indian insurance company. The norms on governance and structuring of investment as applicable to PE Funds appear to a certain extent to be more extensive (such as norms on Fit & Proper status), and these norms will continue to be applicable to insurance companies having PE investments (whether direct or indirect), in addition to the norms specified under the Amendment Rules.

It remains to be seen how investments in the insurance sector will be structured going forward and whether the notification of the Amendment Rules will in any way discourage insurance companies and foreign investors from consider the PE investment structure.

Further amendments to the regulatory framework are expected to bring the same in alignment with the amendments introduced by way of the Amendment Act and the Amendment Rules. Moreover, one may anticipate that with the passage of time the norms set out under the Amendment Rules may evolve as the changes to the insurance sector are studied with the advent of increase in foreign direct investment and the impact of the same on policyholders.

Footnote

1. Please see our detailed article of 2 April 2021 on the subject matter, available at: https://www.mondaq.com/india/insurance-laws-and-products/1053498/74-fdi-allowed-for-the-insurance-sector-amendment-to-the-insurance-act-1938.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.