FII holding in Indian insurance promoter not part of total FDI

Foreign equity investment cap of 49% is applicable to all Indian insurance companies as per earlier definitions by FIPB in their rules in Feb 2015

The Insurance Regulatory and Development Authority of India (Irdai) on Wednesday published a clarification by the department of financial services that holdings of equity in an Indian promoter company held by foreign institutional investors (FIIs), other than the foreign promoters of the applicant and their subsidiaries and nominees, will not be part of the foreign direct investment (FDI). This comes as a relief to several Indian entities that have a high FII holding.

According to the definitions by the Foreign Investment Promotion Board (FIPB) in their rules in February 2015, foreign equity investment cap of 49 per cent is applicable to all Indian insurance companies. Also, it would not allow the aggregate holdings by way of total foreign investment in their equity shares by foreign Investors, including portfolio investors, to exceed 49 per cent of their paid-up equity capital and also shall ensure that ownership and control shall remain at all times in the hands of resident Indian entities.

Last week, FIPB cleared Kotak Mahindra Bank’s proposal to raise foreign investment limit in the lender to 55 per cent. After deferring a decision on the proposal in the past, FIPB, headed by Finance Secretary Rajiv Mehrishi, cleared the application after the department of financial services gave its opinion on the matter, sources said.

Kotak Mahindra Bank had approached FIPB after the Reserve Bank of India barred foreign investments in it, as foreign shareholding hit the permissible threshold following the merger with ING Vysya Bank. Investments from FIIs, foreign portfolio investors and foreign banks had reached 48.55 per cent in the merged entity.

With this clarification that has come now, the confusion over FII holding in insurance promoters acting as a deterrent for foreign promoters to raise their stake to 49 per cent. Indian promoter is required to have at least 51 per cent stake in the insurance venture. Now, according to the new definition, this can also include FII stake.