The Hon’ble Finance Minister of India announced the long-awaited reform for the Insurance Industry in the last year’s Union Budget, extending the foreign investment ceiling in Indian insurers to 74 percent and permitting foreign ownership and control. The Insurance (Amendment) Act, 2021 (Amendment Act) was adopted and announced by the Indian government to undertake this reform, amending the Insurance Act, 1938, with effect from 1 April 2021.
Prior to the Amendment Act, a foreign investor’s total equity holdings, including portfolio investors, could not exceed 49 percent of an Indian insurance company’s paid up equity capital. In addition, Indian insurance businesses had to fulfil ownership and control conditions in India. The Amendment Act changed the definition of Indian insurance business under the Insurance Act, allowing foreign participation of up to 74 percent in an Indian insurance firm. The requirement that an Indian insurance company should be owned and controlled by resident Indians has also been eliminated from the definition of an Indian insurance company. Furthermore, the Amendment Act gave the government the authority to set the terms and circumstances for foreign participation in Indian insurance businesses.
The Indian Insurance Companies (Foreign Investment) Rules, 2015, applied to any Indian insurance company with foreign investment (Foreign Investment Rules). While the Foreign Investment Rules required that every Indian insurance company must have ‘Indian ownership’ and ‘Indian control,’ the Insurance Regulatory and Development Authority of India (IRDAI) published recommendations on ‘Indian owned and controlled’ compliance (Control Guidelines).
The Indian government issued the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2021 (Amendment Rules) on 19 May 2021, allowing up to 74 percent foreign investment in insurance companies. The Amendment Rules have repealed the previous need for Indian ownership and control of Indian insurers, and the IRDAI has withdrawn the Control Guidelines as a result.
The Amendment Rules, on the other hand, have included certain new requirements for the makeup of the board of directors, key management personnel, and dividend declaration by Indian insurers with foreign participation.
According to the (amended) Foreign Investment Rules, an Indian insurance company with foreign investment must ensure that (a) the majority of its directors, (b) at least one of its chairman, managing director, or chief executive officer, and (c) the majority of its Key Management Persons (KMPs) are resident Indian citizens. Insurance businesses with foreign investment (regardless of the amount of the company owned by foreign investors) must comply with certain standards pertaining to board composition and KMPs within one (1) year.
Insurance businesses with a foreign investment of more than 49 percent must comply with the following extra restrictions regarding dividend declaration and board composition:
(a) For a financial year in which a dividend is paid on equity shares and the solvency margin is less than 1.2 times the control level of solvency at any time, not less than 50% of the net profit for the financial year should be maintained in general reserve; and
(b) not less than half of its board of directors must be independent. If the board’s chairperson is an independent director, at least one-third of the board’s directors must also be independent.
The Indian government has changed the foreign direct investment policy as well as the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, to give effect to this liberalisation.
The automated approach raises the investment ceiling for Indian insurers to 74 percent, subject to IRDAI approval and verification. Also, the requirement that the Indian insurance company’s ownership and control stay in the hands of resident Indian organisations at all times has been lifted, allowing for foreign ownership and control of insurance businesses.
The IRDAI published the IRDAI (Indian Insurance Companies) (Amendment) Regulations, 2021 (Amendment Regulations) on 7 July 2021, which change a number of regulations in order to bring them into line with the Amendment Act and the Foreign Investment Rules.
According to the Amendment Regulations, every existing Indian insurance company with foreign investment must file an undertaking with the IRDAI certifying compliance with the board composition and key management personnel criteria. Such undertaking must be officially signed by its chief executive officer and chief compliance officer and submitted within forty-five (45) days of the date of its board of directors’ meeting at which such compliance was confirmed.
In addition to the undertaking, the insurer must file (a) a certified copy of the resolution passed by its board of directors confirming compliance; and (b) where applicable, a certified copy of the agreement/joint venture agreement where amendments to the agreement/joint venture agreement have been carried out to give effect to the provisions relating to board composition and KMPs.
Our comments
Indian insurers will be able to access more money and develop their operations in India as a result of the insurance industry changes. Foreign investors may take advantage of the increased foreign investment cap and the permissibility of foreign ownership and control in Indian insurers to raise their position in insurance joint ventures beyond 49 percent and get majority shareholding and controlling rights.
According to the Control Guidelines, the majority of the directors on the board of an Indian insurer (excluding independent directors) must be nominees of the Indian promoter(s)/Indian investor (s). Furthermore, a legitimate quorum required the participation of a majority of Indian directors (regardless of whether a foreign investor’s nomination was present or not). Foreign investors will have the ability to negotiate governance-related rights in joint venture firms now that the criteria linked to Indian ownership and control have been removed from the Foreign Investment Rules and the Control Guidelines have been withdrawn by the IRDAI.
About the Author:
Dinesh Gupta,
Associate Partner, Clasis Law
E-mail – dinesh.gupta@clasislaw.com
