49% foreign investment in insurance: Automatic… or not?
The insurance sector has been the subject of debate when it comes to foreign investment. After a long prolonged battle, the sector was finally opened to 49% foreign investment, with investment above 26% being under the government approval route. The Finance Minister, in his speech while introducing the budget for 2016-17 had indicated further liberalization in some sectors with respect to foreign investment. Insurance sector was one of the beneficiaries
The Insurance Laws (Amendment) Act, 2015 (“2015 Amendment”) received the assent of the President of India in March, 2015, effective from December 26, 2014. The 2015 Amendment increased the extent of foreign investment in the insurance sector from 26% to 49%. While investment till 26% was under the automatic route, any investment above 26% required the approval of the foreign investment promotion board (“FIPB”). In addition, the Central Government had notified the Indian Insurance Companies (Foreign Investment) Rules, 2015 (“Rules”) permitting investment of up to 49% in the insurance sector, with investments in excess of 26% requiring the approval of the FIPB. Further the 2015 Amendment and the Rules required the ownership and control of the insurance entity to remain with Indian residents. These requirements applied to insurance companies and all insurance intermediaries. Please find our analysis on the 2015 Amendment and the analysis on the interpretation of ‘control’ by Insurance Regulatory Development Authority of India (“IRDAI”) here and here respectively.
The Finance Minister in his speech for Budget 2016-17 had indicated the intention of the government to further liberalize foreign investment into certain sectors, including the insurance sector. The drafts of the changes included permitting foreign investment up to 49% under the automatic route in the insurance sector. In this relation, the Finance Minister notified the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2016 on March 16, 2016 (“2016 Amendment Rules”) which has increased the level of foreign investment to 49% under the automatic route. This has subsequently been followed by the notification of Press Note 1 of 2016 on March 23, 2016 (“PN1”) which amended the foreign direct investment (“FDI”) policy 2015 (“FDI Policy”), reproducing similar changes as in the 2016 Amendment Rules. Finally, the Reserve Bank of India (“RBI”) amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 on March 30, 2016 by the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Fifth Amendment) Regulations, 2016 (“TISPRO Amendment”) to give effect to increase of foreign investment of up to 49% in the insurance sector. PN1 and TISPRO Amendment do not change the requirement for ‘control and management’ of an Indian insurance entity to be with residents.
Changes and analysis
In furtherance of the Finance Minister’s announcements in the budget speech, the Finance Ministry notified the 2016 Amendment Rules, which was followed by PN1 and the TISPRO Amendment. The changes and their analysis are as follows:
While the removal of the FIPB approval for investment up to 49% (forty nine percent) is a welcome move, the possible expansion of IRDAI’s approval requirement for any foreign investment may create more bottlenecks than what it seeks to resolve. It would be important for the regulators to clarify that the position under the earlier law would not be effected by PN1 and the TISPRO Amendment.
1 March 7, 2016 meeting of the FIPB, out of 15 proposals approved, 7 were in the insurance sector itself, which contemplated an aggregated amount of INR 70 billion invested in India.
2 Promoters were not excluded from this restriction.
3 Similar provisions were also present in relevant intermediary regulations.