Policy

Insurance cos getting FDI up to 74% to get 1 year time fulfil conditions for key managerial positions

Shishir Sinha New Delhi | Updated on April 16, 2021

Finance Ministry notifies draft rules

The Finance Ministry has notified draft rules for increased foreign direct investment (FDI) ceiling in the insurance sector. These rules prescribe one year time frame for compliance of requirements related with appointment of Resident Indian Citizens on key management posts. Also, total investment will mean sum of direct and indirect foreign investments, it states.

After announcement in the Budget this year, Parliament approved amendment in the Bill for raising FDI limit to 74 per cent from 49 per cent. According to the Ministry, persons ‘likely to be affected’ can give their suggestions within 15 days from now to the draft rules.

According to the draft, in an Indian Insurance Company having foreign investment, a majority of its directors, a majority of its key management persons, and at least one among the chairperson of its Board, its managing director and its Chief Executive Officer, will be Resident Indian Citizen.

Also read: Government may hike FDI limit in pension sector to 74 per cent

The rules also stipulate that at least 50 per cent of directors in the board will be independent directors. However, if the chairperson is an independent director then at-least one third of its Board shall comprise independent directors, it clarifies.

“Every Indian Insurance Company having foreign investment, existing on or before the date of commencement of the Indian Insurance Companies (Foreign Investment) (Amendment) Rules, 2021, shall within one year from such commencement comply with the requirements of the provisions,” rules said.

Direct foreign investment

It also envisages that total foreign investment in an Indian Insurance Company will mean the sum total of direct and indirect foreign investment by foreign investors in such a company. Investment by foreigner (non-resident) in an Indian entity is considered as Direct Foreign Investment. Investment by an Indian company (which is owned or controlled by foreigners) into another Indian entity is considered as Indirect Foreign Investment. It is also known as downstream investment.

The foreign investment in insurance sector was permitted in the year 2000 by allowing the same up to 26 per cent in an Indian insurance company. Later, in 2015, this limit was raised to 49 per cent. According to an analysis by State Bank of India, in the last 20 years, private insurance companies have explored many new innovations to boost business. However, due to the nature of this business, the sector needs more capital for growth and regulatory needs. The Covid-19 pandemic has shown that further penetration of insurance in India is needed and for that capital infusion is required.

FDIs in private insurers

The report, using March 2019 data, said that the average FDI investments in the 23 private life insurer is only 35.5 per cent, 30 per cent for 21 non-life private insurers and 31.7 per cent for the 7-specialised health insurance. “In our view, the increase in FDI limit in the insurance may receive ₹5,000-6,000 crore of foreign investment in the sector in the next 1-2 years and ₹15,000-16,000 crore in the next 5-years, apart from deeper product expertise and better underwriting skills,” the report said.

Published on April 16, 2021

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