With a population of 1.39 billion and counting as of July 2021, India ought to have ranked among the world’s most lucrative markets for insurance products. However, the penetration of the insurance sector in India (that is, premiums as a percentage of its GDP) stands at 4.2 per cent, much lower than the world average of 7.4 per cent, thereby indicating that India remains an untapped market for insurance products.

Over the last couple of decades, India’s distinctive measures to ease capital controls and attract foreign direct investment (FDI) have paved the way for positioning the country as a preferred destination for FDI. Notwithstanding this progress, the insurance sector has trailed behind other consumer-centric sectors of the economy.

The increase of the FDI cap for investment in insurance companies from 26 per cent to 49 per cent in 2015 was hailed as a welcome step, attracting ₹260 billion of FDI. Despite this interest, the sector was still crippled by the issues that plagued it prior to such increase.

The recent amendment to the FDI policy, which came into effect on August 19, 2021 (that is, the date of issuance of the notification pursuant to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019), has further increased the FDI limit in Indian insurance companies from 49 per cent to 74 per cent.

Key change

However, the key change, which has now attracted the attention of the international community, is the deletion of the condition requiring Indian insurance companies to be, at all times, owned and controlled by persons resident in India. This change is significant in that it is likely to whet the appetite of big insurance players across the world and encourage them to play the role of strategic partners rather than mere investors.

While the Finance Ministry has positioned this increase as a solution to the liquidity crunch being faced by the sector, more infusion of FDI and exercise of control over Indian insurance companies by foreign players (predominantly those with experience in the sector) can play a vital role in making the market more competitive, driving the creation of new insurance products, increasing penetration in the Indian market (mainly the rural areas), and propelling growth for the sector.

That said, in addition to adhering to the requirements relating to verification and approval of the Insurance Regulatory and Development Authority of India for an FDI investment of up to 74 per cent in an Indian insurance company, the Government has tried to balance the ramifications of deletion of the earlier requirement of Indian ownership and control of an Indian insurance company by stipulating that the management professionals of Indian insurance companies having foreign investment are to be resident Indian citizens — the team comprising (a) the majority of directors; (b) key management persons; and (c) at least one among the three principals, namely, chairperson of the board, managing director, and its chief executive officer. It appears that this requirement has been introduced to safeguard the interests of the Indian promoters, and to ensure that the foreign investor continues to rely on Indian citizens with market knowledge to grow the sector.

Therefore, while the various call and put option agreements between Indian promoters and foreign investors are likely to fructify in the near future, leading to big gains for the Indian promoters and a new lease of life for a number of Indian insurance companies, the manner in which foreign investors exercise control over insurance companies through Indian citizens remains to be seen.

This is of particular significance in view of the structures adopted by most foreign establishments for the purpose of their operations in India.

The writer is a Partner with J Sagar Associates, Advocates and Solicitors. Views are personal

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