Government amends FEMA to enable FDI hike in insurance sector to 74%

Applications for FDI in pvt banks having JVs in insurance sector may be addressed to RBI for consideration in consultation with IRDAI to ensure foreign investment limit of 74% is not breached

The government has amended the Foreign Exchange Management (non-debt instruments) Rules, 2019 to enable the increase in foreign direct investment limit in the insurance sector to 74 per cent.

According to the Foreign Exchange Management (non-debt instruments) (second amendment) Rules, 2021, applications for FDI in private banks having joint ventures or subsidiaries in the insurance sector may be addressed to the Reserve Bank of India for consideration in consultation with the Insurance Regulatory and Development Authority of India to ensure that the limit of foreign investment of 74 per cent for the insurance sector is not breached.

In May, the finance ministry had notified the Indian Insurance Companies (foreign investment) Amendment Rules, 2021 that require insurers with foreign ownership of over 49 per cent to maintain a solvency margin of 180 per cent if they declare dividend payments in a financial year.

According to the notified rules, if insurance companies--with foreign ownership above 51 per cent--repatriate profit in the form of dividend to their shareholders, but cannot meet the 180 per cent margin requirement, they will have to set aside 50 per cent of their net profit in a general reserve.

The rules also require such insurance companies to have 50 per cent of their directors as independent directors unless the chairperson of its board is herself or himself one. In that case at least one-third of its board should have independent directors. Foreign-owned insurance companies are also mandated to have the majority of its directors and key management persons as resident Indians.

The safeguards, laid out through a gazette notification, are similar to the requirements prevalent for the telecom sector that include appointing majority resident citizens on the board of the Indian insurance company and ensuring that atleast one amongst the chief executive officer, managing director or chairperson is a resident Indian citizen, said Nischal S Arora, partner at Nangia Andersen LLP. 

“While Indian ownership and control norms may have finally been laid to rest along with ending the era of side agreements, the JV partners must atleast ensure adherence to these residency norms.  Such appointments would also need a nod from the insurance regulator,” Arora said.