Liberalisation of FDI in Insurance Companies – Key takeaways from the Insurance (Amendment) Bill, 2021

The Insurance (Amendment) Bill, 2021 was introduced in the Rajya Sabha on March 15, 2021, which amended the Insurance Act, 1938. The Act provides the framework for functioning of insurance businesses and regulates the relationship between an insurer, policyholders, shareholders, and the regulator (the Insurance Regulatory and Development Authority of India).

The foreign investment in insurance sector was permitted in the year 2000 by allowing the same up to 26 per cent in an Indian insurance company. Subsequently, vide the Insurance Laws (Amendment) Act, 2015, this limit of foreign investment was raised to 49 per cent of the paid-up equity capital of such company, which is Indian owned and controlled as per the rules made in this behalf.

However, in order to achieve the objective of the Government’s Foreign Direct Investment Policy of supplementing domestic long-term capital, technology and skills for the growth of the economy and the insurance sector, it was decided to raise the limit of foreign investment in Indian insurance companies from the existing 49 per cent to 74 per cent.

At the time of the introduction of the bill, it was stated that the bill was to allow foreign ownership and control of insurance companies with safeguards. The term ‘safeguards’ could be interpreted as the right to appoint a majority of directors, control the management of policy decisions including by virtue of their shareholding or management right or shareholder agreements or voting agreements. While control will go to foreign companies, the majority of directors and key management persons will be resident Indians who will be covered by the law of the land.

Presently, the Act requires insurers to hold a minimum investment in assets which would be sufficient to clear their insurance claim liabilities. If the insurer is incorporated or domiciled outside India, such assets must be held in India in trust and vested with trustees who must be residents of India.

Accordingly, the Insurance (Amendment) Bill, 2021, amending the Insurance Act, 1938, seeks inter alia, to provide for the following;

1. The Amendment Bill has brought about changes to the definition of an “Indian Insurance Company” as provided in the Insurance Act. It now clarifies that an “Indian Insurance Company” means any insurer, being a company, which is limited by shares, and (b) in which the aggregate holdings of equity shares by foreign investors including portfolio investors, do not exceed seventy-four per cent of the paid-up equity capital of such Indian insurance company, and the foreign investment in which shall be subject to such conditions and manner, as may be prescribed.
2. Further, the explanation attached to section 27 sub-section (7) of the principal Act, which dealt with Investment, Loans and Management of assets, stood omitted.
3. Additionally, Section 114 of the Principal Act, in sub-section (2), for clause (aaa) which dealt with the Power of Central Government to make rules was amended. The amended section now reads as “In particular and without prejudice to the generality of the foregoing power, such rules may prescribe (aaa) the conditions and manner of foreign investment under sub-clause (b) of clause (7A) of section 2”. The Central Government therefore reserves its ability to make rules on any and all matters in relation to foreign ownership and control in insurance companies and the same can be inferred from the statement “the delegation of legislative power is, therefore, of a normal character” as provided in the Memorandum regarding Delegated Legislation attached to the Amendment Bill.