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The finance ministry has proposed insurance companies with foreign ownership of more than 49 per cent will have to maintain a solvency margin of 180 per cent if they declare dividend payments in a financial year.
If insurance companies repatriate profit in the form of dividend to their shareholders but cannot meet the 180 per cent margin, they will have to set aside 50 per cent of their net profit in a general reserve, according to draft rules proposed by the Department of Financial Services (DFS).
Currently there is no such condition on insurance companies. However, foreign insurance joint ventures typically maintain a solvency margin of 180-200 per cent, and would not face any difficulty in maintaining this cap, said a senior government official.
The condition has been included to safeguard the interests of policyholders, but at the same time “lay out the red carpet for foreign investors”, the official said.
A former official of the Insurance Regulatory and Development Authority of India (Irdai) said: “This requirement has been brought in the draft rules so that only serious players come in.”
“The current guidelines on foreign direct investment (up to 49 per cent) have only one requirement -- the company has to be Indian-owned and -controlled. There is no solvency requirement and whatever is the minimum requirement prescribed by the regulator, it is applicable to all insurance companies,” he said.
Furthermore, the draft rules point out for an Indian insurance company having foreign investment exceeding 49 per cent, not fewer than 50 per cent of its directors will be 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. The rules also propose that an Indian insurance company having foreign investment must have a majority of its directors and key management persons as resident Indians. They also state at least one among the three -- the chairperson of the board, managing director (MD), and chief executive officer (CEO) -- must be a resident Indian.
Joydeep Roy, insurance leader and partner, PwC India, said the rules reflected two things announced in the Union Budget -- of having a majority of board members of insurance companies as Indians and retaining a certain amount of profit as a general reserve.
Calling the guidelines on dividend payment “judicious”, Prakash Agarwal, head (financial institutions), India Ratings & Research, said the move would balance stability as well as investors’ returns.
“The restrictions on dividend payment below a certain threshold through profit retention would help in ensuring that capital buffers are not depleted through dividend payment,” he said.
The rules come a month after Parliament approved the Insurance (Amendment) Bill, 2021, to hike the FDI limit in insurance to 74 per cent.
Insurance companies will have to comply with these requirements within a year of the date of notifying the final rules.
As of March 2020, foreign investment in life insurance companies -- 23 in total -- is 37.41 per cent. Only in nine private life insurers has foreign investment touched 49 per cent. In the general insurance industry, with 21 private insurers, FDI is 28.18 per cent.
“One of the reasons why not many companies have seen FDI going up to 49 per cent is that in the current scenario Indian promoters are very strong and they do not want to extract value from their investment at this nascent stage. They may sell it in the future when they have a sizeable valuation for their company,” the former Irdai official said.
According to insurance experts, this move by the government to increase FDI limit from 49 per cent to 74 per cent will most likely benefit the small players, where currently the Indian partner is not able to bring in more capital to boost growth. In such cases, the foreign partner will have the opportunity to bring in more capital and take control of the companies so that they can compete with the big boys.
