Earlier this year, the Department of Promotion of Industry and Internal Trade, under the Ministry of Commerce & Industry, Government of India, had on February 21, 2020, issued Press Note No. 1 (2020 series) ( “Press Note 1”) , amending the Foreign Direct Investment Policy as contained in the Consolidated FDI Policy, 2017 (“FDI Policy”). The Press Note 1 provided for further liberalization in the Insurance Sector by permitting 100% FDI into Insurance Intermediaries under the automatic route with conditions. Intermediaries or Insurance Intermediaries include insurance brokers, re-insurance brokers, insurance consultants, corporate agents, third party administrator, surveyors and loss assessors and such other entities, as may be notified by the by the Insurance Regulatory and Development Authority of India from time to time.
The Press Note 1 was to take effect upon being notified through a FEMA notification. To this effect, the Department of Economic Affairs, Ministry of Finance, notified the foregoing by amending the Foreign Exchange Management (Non-debt Instruments) Rules, 2019[1], vide the Foreign Exchange Management (Non- debt Instruments) (Second Amendment) Rules, 2020 (“Amendment”). The Amendment, interalia, notified the changes made under Press Note 1 with conditions as listed below:
- No Indian Insurance company shall allow the aggregate holdings by way of total foreign investment in its equity shares by foreign investors, including portfolio investors, to exceed forty- nine percent of the paid-up equity capital of such Indian Insurance Company.
- The foreign investment up to forty-nine percent of the total paid-up equity of the Indian Insurance Company shall be allowed on the automatic route subject to approval or verification by the Insurance Regulatory and Development Authority of India.
- Foreign investment in this sector shall be subject to compliance with the provisions of the Insurance Act, 1938 and the condition that Companies receiving FDI shall obtain necessary license or approval from the Insurance Regulatory and Development Authority of India for undertaking insurance and related activities.
- An Indian Insurance company shall ensure that its ownership and control remains at all times in the hands of resident Indian entities as determined by Department of Financial Services or Insurance Regulatory and Development Authority of India as per the rules or regulation issued by them from time to time.
- Foreign portfolio investment in an Indian Insurance company shall be governed by the provisions contained in Chapter-IV, rule 10 and rule 11 read with Schedule-II of these rules and provisions of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014.
- Any increase in foreign investment in an Indian Insurance company shall be in accordance with the pricing guidelines specified in these rules.
- The foreign equity investment cap of 100 per cent shall apply on the same terms as above to insurance brokers, re-insurance brokers, insurance consultants, corporate agents, third party administrator, Surveyors and Loss Assessors and such other entities, as may be notified by the Insurance Regulatory and Development Authority of India from time to time. However, the condition of Indian owned and controlled, as specified in clause (d) above, shall not be applicable to Intermediaries and Insurance Intermediaries and composition of the Board of Directors and key management persons shall be as specified by the concerned regulators from time to time.
- The foreign direct investment proposals shall be allowed under the automatic route subject to verification by the Authority and the foreign investment in intermediaries or insurance Intermediaries shall be governed by the same terms as provided under rules 7 and 8 of the Indian Insurance Companies (Foreign Investment) Rules, 2015, as amended from time to time: Provided that where an entity like a Bank, whose primary business is outside the insurance area, is allowed by the Authority to function as an insurance intermediary, the foreign equity investment caps applicable in that sector shall continue to apply, subject to the condition that the revenues of such entities from the primary (non-insurance related) business must remain above 50 per cent of their total revenues in any financial year.
- The insurance intermediary that has majority shareholding of foreign investors shall undertake the following:
- be incorporated as a limited company under the provisions of the Companies Act, 2013;
- at least one from among the Chairman of the Board of Directors or the Chief Executive Officer or Principal Officer or Managing Director of the insurance intermediary shall be a resident Indian citizen;
- shall take prior permission of the Authority for repatriating dividend;
- shall bring in the latest technological, managerial and other skills;
- shall not make payments to the foreign group or promoter or subsidiary or interconnected or associate entities beyond what is necessary or permitted by the Authority;
- shall make disclosures in the formats to be specified by the Authority of all payments made to its group or promoter or subsidiary or interconnected or associate entities;
- composition of the Board of Directors and key management persons shall be as specified by the concerned regulators;
Prior to the foregoing liberalization of the Insurance Sector, under the FDI Policy, the Insurance Sector comprised of Insurance Company, Insurance Brokers, Third Party Administrators, Surveyors and Loss Assessors and other Insurance Intermediaries appointed under the provisions of Insurance Regulatory and Development Authority Act, 1999. As a consequence of the Amendment, the Insurance sector stands divided into insurance companies and insurance intermediaries. The sectoral cap for insurance companies under the FDI Policy continues to remain at 49% under the automatic route.
The Amendment provides various conditions that are required to be fulfilled in by insurance intermediaries to have majority foreign shareholding include
- incorporation of limited company in India, thus explicitly excluding partnership / LLPs. The Press Note 1 permits 100% FDI in insurance intermediaries. Also, there is no requirement to have a foreign owned and controlled entity and the foreign investor can now have wholly owned subsidiary in India;
- at least one from among the Chairman of the Board of Directors or the Chief Executive Officer or Principal Officer or Managing Director of the insurance intermediary shall be a resident Indian citizen – while the intent here appears to have the individual overall in charge to be an Indian resident, however, the usage of the “or” here, may dilute the intent here by according element of flexibility to the insurance intermediaries.
- shall take prior permission of the Authority for repatriating dividend – to avoid instances of, if any, of profits being repatriated outside India, and not deploying the same towards the growth, expansion or development of the insurance intermediaries.
- shall bring in the latest technological, managerial and other skills– While the intent here is that in addition to the capital that the foreign investor would bring, it is expected that the investor shall brings in the latest technological, managerial and other skills to the insurance intermediaries, however, the ask here appears generic and perhaps unquantifiable. Therefore, specifics or guidance towards what is expected here would have been more helpful.
- The other obligations highlight the requirements that the regulator will have on the insurance intermediaries to fulfill, in order to keep rightful scrutiny and oversight on their functioning.
– Riya Kothari[2] & Anupam Prasad
anupam@aplawchambers.in
[1] http://egazette.nic.in/WriteReadData/2019/213332.pdf
[2] Riya is a fourth-year student of law at the Pravin Gandhi College of Law (Mumbai University), Mumbai and is currently interning at the Firm. The Firm acknowledges and expresses gratitude for the efforts put in by Riya towards this update.
