Govt notifies changes to FEMA

Shishir Sinha New Delhi | Updated on August 21, 2021

To ensure that private banks having insurance JV do not breach 74% FDI cap

The Finance Ministry has made changes to the Foreign Exchange Management Act (FEMA) regulations to ensure that private banks having joint venture or subsidiary in the insurance sector do not breach the 74 per cent cap on FDI.

Investment limit

Earlier this year, the government enacted a legislation to allow foreign investment limit to 74 from 49 per cent, along with foreign ownership and control with safeguards. Similarly, private banks have foreign investment limit of 74 per cent, but with a condition that no shareholder, irrespective of the shareholding, will have more than 15 per cent of the total voting right.

A notification issued by the Economic Affairs Department of the Finance Ministry said that the application for FDI in private banks having joint venture or subsidiary in insurance sector may be addressed to the RBI for consideration, in consultation with the Insurance Regulatory and Development Authority of India (IRDAI). This needs to be done to ensure that foreign investment limit in insurance is not breached.

Conditions attached

The notification also provided for maintaining conditions attached with foreign investment in insurance sector. One such conditions was that for a bank to act as an insurance intermediary, the foreign equity investment caps applicable in that sector would continue to apply. The said entity will also have to see that revenue from the primary business must remain above 50 per cent of their total revenues in any financial year.

Officials say there could be a situation where the private bank is controlled by Indian residents and its insurance business by a foreign company. As on date, many of the private sector banks have tie-ups with foreign entities for insurance business – ICICI Bank has a tie up with Prudential while PNB has partnered with Metlife.

The RBI guidelines do not permit banks to undertake insurance business with risk participation departmentally; they can do so only through a subsidiary or joint venture set up for the purpose.

Now, if a bank plans to set up such a subsidiary to undertake insurance business with risk participation, it will have to fulfil certain conditions – the net worth of the bank should not be less than ₹1,000 crore, Capital Adequacy Ratio should not be less than 10 per cent, NPA should not be more than 3 per cent, and should have been profitable for the last three consecutive years.

“It should also be ensured that risks involved in the insurance business do not get transferred to the bank, and that the banking business does not get contaminated by risks that may arise from the insurance business. There should be an ‘arm’s length’ relationship between the bank and the insurance outfit,” according to RBI norms.

Banks can also set up a subsidiary or JV for insurance broking or corporate agency. Here, the criteria would be different. These include net worth not less than ₹500 crore, Capital Adequacy Ratio of 10 per cent or more, NPA should not be more than 3 per cent, and the bank should have made a net profit for the last three continuous years.

Published on August 20, 2021

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