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This article is written by Bhavyika Jain, from Symbiosis Law School, Noida. This article deals with the amendment made by the government in the foreign investment of the insurance companies.

Introduction

For numerous years, stakeholders in Indian insurance firms have advocated for an increase in the Foreign Direct Investment (FDI) ceiling for Indian insurance companies to 74 percent, in line with the FDI maximum for banking – the private sector. The Indian Finance Minister announced on 1 February 2021, as part of the national budget address for the financial year 2021-22, that the FDI cap for Indian insurance companies will be raised from 49 percent to 74 percent. Furthermore, it was announced under the new framework that,

  1. Foreign ownership and control would be allowed with safeguards; 
  2. The majority of directors on the Board and key management personnel would have to be resident Indians; 
  3. 50 percent of directors would have to be independent directors; and 
  4. A certain percentage of the insurance company’s profits would have to be donated to the government.

Following this, the Ministry of Finance recently issued the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2021, which amend specific provisions of the Indian Insurance Companies (Foreign Investment) Rules, 2015 to expressly provide the norms that must be followed by insurance companies with foreign investment.

Foreign Direct Investment (FDI)

Foreign direct investment is the investment made when the company takes ownership or control of a business entity in another country. There is the direct involvement of the foreign companies with the foreign direct investment for regulation of the day-to-day operations in another country. This opens a way not only for money but also for knowledge, skills, and technology. In general, FDI occurs when an investor develops overseas business activities or acquires foreign business assets, such as acquiring ownership or control of a foreign company.

In open economies with skilled workforces and growth potential, foreign direct investment is widespread. In India, FDIs are an important source for its development. Foreign direct investment in India has steadily increased when the economic liberalization started in the wake of the 1991 crisis. Today, India is a part of the top 100 clubs on Ease of Doing Business and globally ranks number 1 in the greenfield FDI ranking.

Insurance Regulatory and Development Authority of India (IRDAI)

The Insurance Regulatory and Development Authority of India is an autonomous and statutory agency charged with overseeing and regulating India’s insurance and reinsurance industries. It consists of a 10 member body including a chairman, five full-time members, and four part-time members. It was established in 1999 by an Act of Parliament, and its headquarters are in Hyderabad.

Background

In 1950, India’s insurance industry was nationalized by the government of India, and the Life Insurance Corporation (LIC) was established. Upon the decision taken by the government in the 1990s, the insurance sector was opened up to the private players. To set up the proposed reform a committee was set up and later as a part of the decision of the committee IRDAI was formed. When the market opened up in 2002, the limit of the stake which the foreign firms were allowed to buy was up to 26 percent which later was capped at 49 percent by the government of India. Finally, in the budget 2020, the limit was pulled up to 100 percent.

Role of IRDAI

In India, the insurance sector is considered one of the growing sectors. The role of IRDAI is to protect the interests of the insurance policyholder and to ensure them with a fair outcome. It also has to keep a check that a common man’s interests are not subverted by keeping an eye on the policy issuers. A growth of 11.36 percent was seen in collective premium income to Rs. 48.26 trillion during the financial year which ended in March 2020. 

Redrafting of the Act

The Insurance Companies (Foreign Investment) Amendment Rules, 2021 were recently issued by the Ministry of Finance which amends the provisions stated in the Insurance Companies (Foreign Investment) Rules, 2015. It provides us with the rules and regulations that have to be followed by all the insurance companies having foreign investment.

The new amended rules stated as:

  • According to Rule 2(o), the term “Resident Indian Citizen” must have the meaning accorded to it in any foreign direct investment strategy that the federal government may formulate from time to time.
  • As per Rule 2(p), total foreign investment has been defined as the sum total of the direct foreign investment and indirect foreign investment by the foreign investor in such a company, which is calculated as per the manners that are prescribed in the regulations made by the Authority with regard to registration of the Indian insurance companies.
  • As per Rule 4, a majority of the directors, a majority of the senior management personnel, and at least one of the chairpersons of the board, managing director, and chief executive officer of Indian insurance business with foreign investment must be Indian citizens.
  • Every Indian insurance company with foreign investment that existed on or before the starting of the Indian Insurance Company (Foreign Investment) Amendment Rules, 2021 must comply with the provisions as stated in sub-rule(1), within one year of such commencement.
  • An Indian insurance company having foreign investment exceeding 49 percent for a financial year for which the dividend paid on equity shares and for which at any time the solvency margin is less than 1.2 times the control level of solvency, not less than 50 percent of the net profit for the financial year shall be retained in general reserve; and not less than 50 percent of its directors shall be independent directors unless the chairperson of its board is an independent director, in which case at least one-third of its board shall comprise of independent directors, as stated in Rule 4(a)
  • As per Rule 5, 49 percent shall be substituted with 74 percent.
  • As per Rule 8, for the letters “FEMA”, the words, brackets, and figures “Foreign Exchange Management Act, 1999 (42 of 1999)” shall be substituted.

Significance of the amendment

  1. The growth in foreign ownership to 74 percent could lead to the adoption of global best practices in insurance products in the future. It would also aid in the reduction of insurance product costs in India.
  2. It is good from the point of view of the promoters as they can keep control of the management and the board and also the additional capital inflow generated would help them with funds that will lead to the growth of the country.
  3. It will also help in strengthening and building healthy competition across the industry.
  4. It is of benefit to the small insurance players or the ones where the sponsors do not have to put in much capital.
  5. As India has the lowest insurance penetration level globally, it will help the local private insurers to grow and expand faster.

Insurance penetration in India

Currently, India’s insurance penetration is at 3.7 percent of the Gross Domestic Product (GDP) as compared to the world’s average of 6.3 percent. The life insurance industry’s growth has slowed to 11-12 percent from 15-20 percent till fiscal 2020, as the pandemic has prompted customers to save money rather than invest in stocks or life insurance plans.

There were just 24 life and 34 non-life direct insurers in India as of March 31, 2021, compared to 243 life insurance businesses in 1956 and 107 non-life insurance companies in 1973 when the country was nationalized.

Model Insurance Villages (MIV)

Model Insurance Villages are formed by the IRDAI, in order to make the concept of insurance penetration as well as the benefits of insurance understandable in rural areas and also to boost the insurance penetration of India. Financial assistance should be sought from National Board For Rural Agriculture And Development (NABARD), other institutions, CSR (Corporate Social Responsibility) funds, government support, and reinsurance companies to make the premium affordable. In the first year, it will be implemented in a minimum of 500 villages across the country, with an increase to 1,000 villages in the following two years. For the piloting of the concept, every general insurance and reinsurance company that accepts general insurance business and has operations in India must be involved.

Lack of awareness, a restricted selection of insurance products, a lack of user-friendly and transparent claim settlement methods, and a weak network of insurance firms are just a few of the concerns and challenges that rural insurance businesses face as they seek to expand.

International view on Foreign Direct Investment

Canada

After the establishment of the Foreign Review Act in 1973, which was subsequently replaced by the Investment Canada Act (ICA) in 1985, foreign investment began in Canada, making it an ecologically favorable location to invest. After the establishment of the Foreign Review Act in 1973, which was subsequently replaced by the Investment Canada Act (ICA) in 1985, foreign investment began in Canada, making it an ecologically favorable location to invest. The recent development shown in the investment graph suggests that the Prime Minister of Canada, Mr. Justin Trudeau, has encouraged foreign investment which was affected by the changes in the geopolitical tensions and the COVID-19 pandemic. There are two separate interdependent regimes for review under the Investment Canada Act:

  • Net benefit reviews are aimed at determining whether the proposed transaction is of any benefit to Canada.
  • National security reviews.

United Kingdom

The National Security Investment Act, 2021 received Royal assent recently making reforms to UK Foreign Direct Investment (FDI). The new regime will install a mandatory pre-notification requirement and separate the UK government’s FDI review from the CMA’s review under the merger control rules. While lower merger control criteria will continue to apply for specific sectors with special national security implications, the UK government will have the right to halt the CMA’s examination if necessary to address national security concerns. The Act also creates a new unit within the Department of Business, Energy, and Industrial Strategy (BEIS) to investigate such transactions.  

Botswana

Botswana’s government has said that one of its goals is to stimulate direct investment, primarily through macroeconomic stability and non-discrimination. According to a recent evaluation of investment policy, both foreign and domestic investors are treated and protected to a high degree. Between 1999 and 2003, the researchers discovered that 15 rules are generally transparent and consistently enforced and that the government successfully encourages competition. 

Botswana has continuously been regarded as the least corrupt African country and among the top 25% of countries worldwide by Transparency International.

New Zealand

The New Zealand government supports foreign investment that is sustainable, productive, and inclusive. Overseas investment promotes job creation, the development and use of new technologies, the development of human capital, and the expansion of New Zealand’s international linkages, such as access to global distribution networks and markets. New Zealanders’ living standards would be lower without foreign investment. New Zealand’s primary mechanism for controlling foreign investment is the Overseas Investment Act, 2005. It aims to strike a balance between the need to encourage high-quality investment and the government’s ability to handle risks. The Act accomplishes this by establishing a long-term framework for vetting foreign investments in sensitive assets to ensure that they benefit New Zealand and are in the country’s best interests.

Conclusion

Clarity has been provided with the introduction of the Amendment Rules on the norms of governance that are required by the companies having a foreign investment of more than 49 percent. These norms will also be applicable to the private equity investments irrespective of whether it is a direct or indirect investment as per the Amendment Rules, 2021. It’s unclear how insurance investments will be organized in the future, and whether the notification of the amending rules will deter insurance companies and international investors from contemplating the private equity investment structure.

Further changes to the regulatory framework are likely to match it with the revisions made by the amendment act and the amendment rules. Furthermore, it is possible that the amendment rules’ requirements will evolve over time as changes in the insurance business are analyzed, such as the impact of increased foreign direct investment on policyholders.

References

 


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