INTRODUCTION
On 1st of February when the Union Budget was presented by Hon’ble Finance Minister, it was made official that the Foreign Direct Investment in the insurance sector will increase to 74% from 49%. While concluding the speech respected finance minister also mentioned that it is proposed to amend the Insurance Act of 1938. This was indicative that such changes were to be brought by the way of amendment only. The said was complied with when on 18th March the Insurance (Amendment) Act 2021 (which was a bill then) got a nod from the Rajya Sabha and has been in effect from the 1st April, 2021.
With the change in composition of FDI limit certain additional regulatory changes were also announced under the new framework which includes A. Foreign ownership and control would be allowed with safeguards; B. The majority of directors on the Board and key management persons would be required to be resident Indians; C. 50% of directors would need to be independent directors; D. a specified percentage of profits of the insurance company would have to be retained as a general reserve.
HISTORY OF ADVENT OF FDI IN INSURANCE SECTOR
India first opened up the insurance sector in the year 2000 under the Atal Bihari Vajpayee government when it allowed private sector firms to set up insurance companies and allowed FDI of 26 per cent. After that, for a long time, there were demands from the industry to further increase this cap to 49 per cent. After many deliberations the amendment of 2015 raised the cap from 26 per cent to 49 per cent.
The amendments of 2015 and 2021 are an enabling amendment that gives companies access to foreign capital if they need it. It is an important shift in stance as the increase in the FDI cap means insurance companies can now be foreign owned and controlled as against the current situation wherein they are only Indian owned and controlled. This will give a foreign company the right to appoint a majority of directors, control the management and the policy decisions taken.
This decision is also a result of COVID-19 Impact on the GDP, and by increasing the FDI in insurance sector government aims at getting a influx of foreign capital in the economy in order to uplift the GDP of the country.
CHANGES BROUGHT BY THE AMENDMENT
The amendments introduced by the 2021 Amendment Act are as follows:
• Firstly, change is brought in section 2, clause (7A), for sub-clause (b) which has been substituted as:
“(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;”
The amended provision states that limit of foreign investment allowed in Indian insurance companies shall not exceed 74% (previously 49%), and foreign investment in insurance companies shall be “subject to such conditions and manner, as may be prescribed.”
• Secondly, the explanation to Section 27 clause 7 which states the provision which stipulated the requirement for an insurance company incorporated in India to hold assets in trust where at least: (i) 33% capital is owned by investors domiciled outside India, or (ii) 33% of the members of the governing body are domiciled outside India, now stands omitted;
• Thirdly, In section 114 of the principal Act, in sub-section (2), for clause (aaa), the following clause shall be substituted, namely:
“(aaa) the conditions and manner of foreign investment under sub-clause (b) of clause (7A) of section 2;”.
The requirement for the insurance company to be Indian owned and controlled has been omitted, and it has been stipulated that the conditions and manner of foreign investment shall be as prescribed.
IMPACT ON INDIAN INSURANCE COMPANIES
India has more than 60 insurance companies specialising in life insurance, non-life insurance and health insurance. The number of state-owned firms are only six and the remaining are in the private sector. A higher FDI limit will help insurance companies access foreign capital to meet their growth requirements. Insurance is a capital intensive business. Simply put, as an insurance company sells more policies and collects premiums from policy holders, it needs higher capital to ensure that it is able to meet the future claims.
The insurance regulator, Insurance Regulatory and Development Authority of India (IRDAI), mandates that insurers should maintain a solvency ratio of at least 150 per cent. Solvency ratio is the excess of assets over liabilities. Insurance is a long gestation business. It takes companies 7-10 years to breakeven and start becoming profitable. Allowing FDI upto 74 per cent could see more interest from foreign insurance companies who specialise in this business and who bring the so-called ‘patient’ capital.
In addition, the government will prescribe a specific percentage of the profits that will have to be treated as general reserve.
This will ensure that reserves will be available to meet the claims of policy holders regardless of a foreign investors’ own financial condition, Finance Minister Nirmala Sitharaman said Thursday in her reply to the debate on the bill in Rajya Sabha. It will also mean that the government will ensure that only a part of the profit can be repatriated to the foreign promoter and there is sufficient money available with the insurance company to pay every claim.
The government has also reiterated that the provision of Section 27E of the insurance act will continue to be applicable. This means that no insurance company, irrespective of its foreign shareholding, can directly or indirectly invest the money of the policy holders outside India. The insurance companies will also have to ensure that 50 per cent of the directors are independent directors so that insurance companies follow all Indian laws.
WAY FORWARD
The Amendment Act of 2021 has been introduced with the sole motive to increase FDI per cent in the insurance sector for this the Insurance Act, 1938 was amended accordingly, however the onus now lies upon the Regulator which is IRDA. The IRDAI may also prescribe conditions/restrictions with respect to matters such as related party transactions, and payment of dividend by an insurance company having majority foreign investment. However, the extent to which these conditions will be made applicable to insurance companies remains to be seen.
In generally, Higher FDI limits could see more global insurance firms and their best practices entering India. This could mean higher competition and better pricing of insurance products. Policy holders will get a wide choice, access to more innovative products and a better customer service and claims settlement experience. Therefore the amendment brings the new horizons in the insurance sector which the companies will thrive to achieve and benefit the economy.
The government will prescribe a specific percentage of the profits that will have to be treated as general reserve.