5 October 2021
In the Union Budget 2021-22, the Hon’ble Finance Minister of India announced the long awaited reform for the Insurance sector i.e. increasing the foreign investment cap upto 74% in the Indian insurers and allowing the foreign ownership and control. In order to implement this reform, the Insurance (Amendment) Act, 2021 (Amendment Act) was enacted and notified by the Indian government, which amended the Insurance Act, 1938 with effect from 1 April 2021.
Prior to the Amendment Act, the aggregate equity holding by foreign investors, including portfolio investors, was not permitted to exceed 49% of the paid up equity capital of an Indian insurance company. Further, the Indian insurance companies were required to meet the criteria of Indian ownership and control. The Amendment Act has amended the definition of the Indian insurance company under the Insurance Act and allowed the foreign investment in an Indian insurance company upto 74%. The stipulation of Indian ownership and control for an Indian insurance company has also been removed from the definition of the Indian insurance company. Further, the Amendment Act empowered the government to prescribe the conditions and manner of the foreign investment in the Indian insurance companies.
An Indian insurance company having foreign investment is required to comply with the Indian Insurance Companies (Foreign Investment) Rules, 2015 (Foreign Investment Rules). While the Foreign Investment Rules had stipulated, inter alia, the conditions of 'Indian Ownership' and 'Indian control' for every Indian insurance company, the Insurance Regulatory and Development Authority of India (IRDAI) had issued the guidelines on compliance of 'Indian owned and controlled' (Control Guidelines).
On 19 May 2021, the Indian government notified the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2021 (Amendment Rules) to, inter alia, allow the foreign investment in insurance companies upto 74%. The Amendment Rules have removed the erstwhile stipulation regarding the Indian ownership and Indian control in Indian insurers and consequently, the IRDAI has also withdrawn the Control Guidelines.
The Amendment Rules have, however, introduced certain additional conditions with regards to the composition of the board, key management persons and declaration of dividend by Indian insurers having foreign investment.
As per the (amended) Foreign Investment Rules, an Indian insurance company having foreign investment will have to ensure that (a) the majority of its directors, (b) at least one among the chairperson of its Board, its managing director or its chief executive officer, and (c) majority of its Key Management Persons (KMPs), are resident Indian citizens. The Insurance companies having foreign investment (irrespective of the percentage of stake held by the foreign investors) shall have to comply with these requirements related to the composition of the board and KMPs within a period of one (1) year.
The Insurance companies having more than 49% foreign investment shall be required to comply with the following additional conditions related to declaration of dividend and board composition:
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not less than 50% of the net profit for the financial year shall be retained in general reserve for a financial year for which dividend is paid on equity shares and for which at any time the solvency margin is less than 1.2 times the control level of solvency; and
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not less than 50% of its directors shall be independent directors. In case the chairperson of its board is an independent director, then at least 1/3rd of the directors on its board must be independent directors.
In order to give effect to this liberalisation, the Indian government has amended the FDI policy and the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 to enhance the foreign investment limit for the Indian insurers to 74% under the automatic route subject to approval/verification by the IRDAI. Also, the earlier stipulation that the ownership and control of the Indian insurance company shall remain at all times in the hands of the resident Indian entities has been removed to pave the way for foreign ownership and control of insurance companies.
On 7 July 2021, the IRDAI has notified the IRDAI (Indian Insurance Companies) (Amendment) Regulations, 2021 (Amendment Regulations) which have amended various regulations in order to harmonise such regulations with the Amendment Act read with the Foreign Investment Rules.
As per the Amendment Regulations, every existing Indian insurance company having foreign investment shall be required to file an undertaking with the IRDAI confirming compliance with the conditions related to the board composition and key management persons. Such undertaking shall have to be duly signed by its chief executive officer and its chief compliance officer and filed within a period of forty five (45) days from the date of the meeting of its board of directors, whereat such compliance has been confirmed.
Along with the undertaking, the insurer shall also be required to file (a) a certified copy of the resolution passed by its board of directors confirming the 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 the board composition and KMPs.
Our comments
The reforms in the insurance sector would enable the Indian insurers to access more capital and expand their business in India. With the increase in the foreign investment cap and the permissibility of the foreign ownership and control in Indian insurers, the foreign investors may use this opportunity to increase their stake in insurance joint ventures beyond 49% so as to acquire majority shareholding and controlling rights.
In terms of the Control Guidelines, the majority of the directors (excluding independent directors) on the board of an Indian insurer were required to be nominees of the Indian promoter(s)/Indian investor(s). Further, the presence of majority of the Indian directors (irrespective of whether a foreign investor's nominee is present or not) was required to constitute a valid quorum. Since the conditions related to the Indian ownership and control have been removed from the Foreign Investment Rules and the Control Guidelines have been withdrawn by the IRDAI, the foreign investors would now have an opportunity to negotiate the governance related rights in the joint venture entities.
For further information, please contact:
Dinesh Gupta, Associate Partner, Clasis Law
dinesh.gupta@clasislaw.com
