The Centre has notified rules for higher foreign direct investment (FDI) in the insurance sector, which will help foreign companies raise or make fresh investments in Indian companies.

The new rules have come almost two months after an ordinance was promulgated.

Technically speaking, even if the ordinance lapses now, the rules will continue to be in place and accordingly all actions will have legal validity.

The ordinance was issued as the Insurance Laws (Amendment) Bill has been pending in Rajya Sabha since 2008.

Now, it is mandatory for the Government to get the Bill passed, otherwise the ordinance will lapse.

The Centre, on its part, expects the Bill to sail smoothly in the Budget session of Parliament slated to begin on Monday.

According to these rules, foreign equity investment cap of 49 per cent is applicable to all Indian insurance companies. This will comprise both FDI and foreign portfolio investment (FPI). FDI means buying equity directly from the company and proceeds going to the company, while FPI refers to buying equity from the stock market, but money not going to the company. Instead, the shareholder, in its personal capacity, gets the money.

The 49 per cent limit is the composite cap, which means FDI or FPI alone can have 49 per cent. However, SEBI norms prescribe that FPI investment cannot be more than 24 per cent in a company.

Only if shareholders approve, FPI investment can go up to 49 per cent.

The rules also say that Indian insurance companies should ensure that ownership and control remains in the hands of resident Indian entities.

FDI proposals up to 26 per cent of the total paid-up equity of an Indian insurance company will be allowed on the automatic route, and FDI proposals which take total foreign investment above 26 per cent and up to the cap of 49 per cent, will require Foreign Investment Promotion Board approval.             

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