Govt draft norms to ease compliance for foreign investment in insurance

The draft norms for foreign investment in insurance propose easing compliance by scrapping residency requirements for directors and KMPs while retaining key leadership conditions

The government’s draft norms for the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2015, are expected to ease compliance for foreign investment in the sector and give comfort to global players, according to experts.

 

The norms, put out last week, propose to omit the clause that requires a majority of directors and key management persons (KMP) to be resident Indian citizens in companies that have significant foreign investment.

 

This, according to experts, is expected to ease the compliance burden for companies. 

 

However, the norms have retained the clause that one among the chairperson, managing director, and chief executive officer of the company must be a resident Indian.

 

“There are additional conditions like if foreign investment exceeds 49 per cent, 50 per cent of the board must comprise independent directors, and also retaining a higher net profit, etc. For many investors, these restrictions were enough to deter them from entering the Indian market and the insurance sector hardly witnessed an incremental increase when the foreign investment limit was increased from 49 per cent to 74 per cent,” said Shivangi Sharma Talwar, partner, JSA Advocates & Solicitors.

 

“While insurance companies could be foreign-owned, it was dampening to see such conditions for foreign investment. Relaxation in conditions associated with foreign investment may not be the only factor in entering India, but it will ease their compliance burden,” said Talwar.

 

Additionally, the government has proposed to substitute the words “to exceed seventy-four percent of the paid-up equity capital of such an Indian Insurance Company” with “to exceed the limit as stipulated by the Insurance Act, 1938”. This is considered a precursor to the government’s plans to revise the foreign direct investment (FDI) limit to 100 per cent from the existing 74 per cent as proposed by the finance minister in the Union Budget.

 

Furthermore, the norms have omitted the clause that required an insurance company that has foreign investment and has paid dividend to retain the dividend in the general reserve in the financial year if the solvency margin for the company was less than 1.2 times the control level of solvency but not less than 50 per cent of the net profit for the financial year. The board also need not take permission from the regulator before repatriating the dividend. 

 

“…This change (on the capital-retention requirement) specifically would extend comfort to global investors as far as the profitability of such investment is concerned,” said Lokanath P Kar, founder, ElpeeCo.