By Anuj Shah, Harsh Khemka, Srishti Mukherjee
Union Budget 2021: The Hon’ble Finance Minister announced an improve in the foreign investment limit for insurance coverage providers from 49% to 74% in her price range speech on 1 February 2020. This is a considerably-awaited improvement that will assistance the Indian insurance coverage sector attain tremendous development by means of vast pools of capital and finest in class know-how.
Erstwhile position
Until 2015, foreign investment in the insurance coverage sector beneath the automatic route (ie, devoid of Government approval) was capped at 26%. In 2015, the Government permitted Indian insurance coverage providers to have up to 49% foreign investment, with the caveat that such providers stay ‘Indian owned and controlled’. This situation has been a deterrent for quite a few prominent worldwide insurers from setting up enterprise in India.
Proposed modifications
Under the new proposal, foreign ownership and manage of Indian insurers will also be permitted with some ‘safeguards’. The safeguards proposed in the price range speech seem affordable and contain needs such as majority of the board of directors and crucial management persons of the insurance coverage business comprising of Indian residents and that 50% of the board composition really should comprise of independent directors. Further, to make sure that adequate capital is retained in the books of the insurance coverage business, foreign owned insurers will be necessary to hold a specified percentage of income as ‘general reserves’.
What to watch out for
The detailed guidelines and regulations with regards to implementation of the elevated FDI limit, along with more safeguards, will be formulated by the Ministry of Finance (MoF) and the sectoral regulator – Insurance Regulatory and Development Authority of India (IRDAI). The MoF and IRDAI will be necessary to play a balancing act – on the one hand, to defend the lengthy-term interests of Indian policyholders and make sure stability in the insurance coverage sector and on the other, make sure that these regulations are not onerous for foreign investors so as to discourage them from expanding their presence in India.
The prior improve in FDI limits in the sector was accompanied by the ‘Indian Ownership and Control’ suggestions, as a outcome of which, the sector witnessed restricted foreign investors growing their stake from 26% to 49%. Similarly, the improve in foreign investment limits in insurance coverage intermediaries from 49% to one hundred% final year, was coupled with stringent situations, such as requiring IRDAI approval for repatriation of dividends and imposition of thresholds vis-à-vis transactions with associated parties. Given the clear message in the price range speech that insurers will be permitted to have foreign ownership and manage, we anticipate some of the earlier regulatory overhang that has withheld the sector from attaining its complete possible, to come to an finish.
Need for elevated FDI
While the Indian insurance coverage sector has been open to private players for practically two decades, it is pretty underdeveloped compared to other significant economies, with low insurance coverage penetration. The improve in FDI limits will assistance the sector expand and service several more Indians. Several insurers have been restricted from expanding, as money-strapped Indian JV partners could not meet additional funding obligations, and the 49% foreign investment cap prevented the foreign shareholder from infusing capital devoid of the Indian companion participating in the capital raise.
The RBI has not too long ago proposed to cap the investments of banks in insurance coverage providers to 30% in order to isolate them from dangers emanating from non-core firms, such as insurance coverage. As such, this announcement is effectively-timed as foreign investors will be a viable substitute for insurance coverage providers promoted by banks.
In the previous decade, no new life insurance coverage business has been set up, and only a handful of common insurance coverage providers have been incorporated. Insurance is a capital-intensive enterprise and needs lengthy-term investment from promoters to make sure compliance with IRDAI’s solvency needs (a prescribed asset-liability test). With this alter, in addition to current foreign investors growing their stakes in their insurance coverage JVs, quite a few foreign insurers will be encouraged to set up shop in India as they will now get a say in the day-to-day affairs and policy choices of the insurer.
Conclusion
For the insurance coverage sector to definitely attain its possible, Indian insurers will want to rely on capital and technical know-how of foreign partners to scale-up and give more sophisticated and revolutionary goods. We anticipate that this newly located tail-wind of foreign capital and access to know-how will usher in a new era of development in the insurance coverage sector.
(Anuj Shah is Partner, Harsh Khemka is Senior Associate and Srishti Mukherjee is Associate at Khaitan & Co. Views expressed are the authors’ personal.)