Foreign Direct Investment: Rules eased for insurance, pension, securities and NBFCs

Instead of FIPB, Irdai can now approve increase in FDI in insurance

Finance Minister Arun Jaitley announced on Monday all 49 per cent of foreign investment limit in private insurance companies could come through the automatic route. However, management and control of insurance companies would have to be in the hands of Indian entities.

Foreign investment rules were also eased for asset reconstruction companies and non-banking financial companies (NBFCs) in the Budget for 2016-17.


Beside, cap for a foreign investment was also raised for stock exchanges.

The Insurance Laws (Amendment) Act, 2015, had increased the foreign direct investment (FDI) allowed from 26 per cent to 49 per cent, if it was routed through the Foreign Investment Promotion Board (FIPB). However, it had maintained foreign investment beyond 26 per cent would be through the FIPB route. An application had to be made to FIPB for approval, after which the insurance regulator had to clear the proposal.

Now applications need to go only to the Insurance Regulatory and Development Authority of India (Irdai). It is not clear what will happen to applications pending with FIPB.

Bhargav Dasgupta, managing director and chief executive officer (MD & CEO), ICICI Lombard, said this had made it easier for increasing FDI in general insurance. ICICI Lombard's earlier proposal for an FDI hike by its foreign partner is pending with FIPB.

Fairfax Financial Holdings has said it will increase its stake in ICICI Lombard General Insurance to 35 per cent, from 25.7 per cent.

"In the past one year there has been no primary infusion of capital in insurance companies. Making the process automatic will make it easier for new companies to enter, leading to more capital in the insurance sector," said Shashwat Sharma, partner, management consulting, at KPMG in India.

When the threshold was raised last year, it was expected Rs 10,000-20,000 crore would come in as FDI into the insurance sector. While deals to hike foreign partners' stakes to 49 per cent have been concluded, it has largely been an exchange of funds between shareholders.

Sandeep Patel, MD & CEO, Cigna TTK Health Insurance, said his company would benefit from the latest decision because it had just begun the process of seeking approval for an FDI hike.

The same rules will apply to pension funds because the Pension Fund Regulatory and Development Authority (PFRDA) Act automatically links the foreign investment threshold in the pension sector with the insurance sector.

Also, the investment limit for foreign entities in stock exchanges will be enhanced from the present five per cent, to 15 per cent. Beside, the 10 per cent FDI allowed in asset reconstruction companies (ARCs) will be allowed through the automatic route. Foreign portfolio investors (FPIs) will be allowed up to 10 per cent of each tranche in security receipts issued by ARCs subject to sectoral caps.

The 24 per cent limit for investment by foreign portfolio investors in central public sector enterprises, other than banks, that are listed on stock exchanges will be increased to 49 per cent. The basket of eligible FDI instruments will be expanded to include hybrid instruments subject to certain conditions.

Beside, FDI will be allowed in the automatic route beyond the 18 specific NBFC activities to other activities overseen by financial regulators.