THE ROLE OF FEMA (NON-DEBT INSTRUMENT) (2nd) RULES, 2021 IN THE AGGRANDIZING OF FDI IN THE INSURANCE


This article has been authored by Surabhi Srinivasan, a 4th year student from Symbiosis Law School, Hyderabad.


Introduction

Foreign Direct Investment (FDI) has played and continues to play an integral role in the overall economic development in India, it also plays a contributory role in the GDP, FDI in India can be made through two routes, namely, automatic route and government approval route. FDI in the insurance sector can be made through the automatic route, however the percentage of FDI permissible is capped, and the cap is set by regulatory authorities and the government.


Sectoral Cap ensures that the maximum investment that is received as a foreign investment must conform to the set percentage. Press Note no.2 issued by DPIIT, earlier in 2021 amended the sectoral cap in the insurance sector for FDI and increased the threshold from 49% to 74%. In consonance with this the Indian Insurance Companies (Foreign Investment) Rules, 2015 was amended, and the Insurance (Amendment) Bill, 2021 was passed in the month of March.


The Insurance Amendment Bill, 2021


By virtue of the amendment made to the Insurance Act, Section 2(7A)(b) the definition of an Indian insurance company now states ‘an insurer in which the aggregate holdings of equity shares by foreign investors, including portfolio investors, do not exceed 74% of the paid-up equity capital of such insurer’. Since the foreign investments can only be made if certain requisites set out by the Central Government have been met. In order to ensure that the government is conferred with the necessary powers to lay down any conditions, Section (114) (2) (aaa) of the Insurance Act has been substituted by the amendment. Therefore, by reading Press Note 2 of 2021 with the Insurance Amendment Bill, 2021 as of this day the approved percentage of foreign investment is 74% of the paid-up equity capital of the company.


Further, Section 27 of the Insurance Act which lays down the requirement for an investment of an insurer and the percentage of assets that ought to be invested as per the law, Section 27(7) prescribes certain requites relating to an instrument of trust. The trust in question refers to the assets invested as per Section 27 by an insurer who is not incorporated or domicile of India held by a trustee who is an Indian resident according to the Insurance Regulatory and Development Authority of India (IRDAI).


The explanation to Section 27(7), specifically directed certain scenarios wherein Section 27 would apply to an Indian incorporated insurer, however the amendment aimed to omit the explanation.


The Significance


The very essence of the insurance sector is that it is capital-intensive. There is always a constant demand in the industry for increased capital in order for it to thrive, especially considering that the break-even in the industry only occurs after about half a decade or a decade. As of this date, there are about 60 odd insurance companies that contribute to about 3.76% of the GDP, however globally the contribution of the insurance industry to the GDP of a country is around 7%.


Given the current scenario, there are instances wherein many insurers and insurance companies would have started out ambitiously but are currently struggling to stay afloat; especially given that the solvency ratio is set at a mammoth of 150%, with the relaxation of the sectoral cap, and an influx of funds, the insurers and companies can now stay in business.


Hence, the increase in the threshold will aid and assist in ensuring that the industry’s contribution to the GDP increases significantly.


The impact of the increase in the sectoral cap is that now Insurance companies can be foreign-owned and controlled vis-à-vis when the 49% cap existed companies could only be owned and controlled in India. This gives rise to foreign entities to operate in India. On one hand, this ensures that best global practices in the sector can be implemented in India, on the other if control of the company rests in foreign entities it can be a cause for concern; nonetheless, the safeguards have to be analyzed to understand the protection that extends to the policyholders’ money.


The Safeguards


Policyholders are those persons that own any form of an insurance policy, and it is essentially their money at stake which is the crux of the finance of the Insurance sector. In order to protect the money of the policyholders, there have certain safeguards put in place. The Insurance Act along with the Foreign Investment Rules, mandate that the Indian insurance companies must be “owned & controlled” by Indian residents. This offers for a wide interpretation and does not provide for an airtight regulation.


The extent of ownership & control has not been set in stone by the aforementioned regulations but rather have been mentioned in the IRDAI guidelines on Indian Owned & Controlled (IOC Guidelines) insurance companies wherein the definition of ‘control’ and ‘Indian ownership’ was contained but are now omitted vide circular dated 31.07.2021. The IOC guidelines confer powers on Indian promoters with regards to the nomination of non-independent directors. However, given the current amendments, it was not possible that the guidelines provided sufficient safeguards necessary especially since 74% indicated that the majority stake can be held by foreign investors.


There were certain proposals put forth by the Finance Minister Ms. Sitharaman. The proposals envisaged that the majority of directors and key managerial persons of the insurance companies must be Indian residents, and further, the board of directors must consist of a minimum of 50% of independent directors.


Hence, The Foreign Exchange Management (Non-debt Instruments) (Second Amendment) Rules, 2021 was promulgated on August 19th, 2021. The rules revised the cap for the insurance sector and also for applications for foreign direct investment in private banks which have joint ventures or subsidiaries in the insurance sector to 74% from the earlier 49%.


Further by way of subs tuition, the rule has substitution the provision which refers to ownership and control with regards to an Indian resident and substituted it with the conditions that (i) majority of its directors; (ii) a majority of its Key Managerial Person; and (iii) at least one among the chairperson of its Board, its Managing Director and its Chief Executive office, shall be Indian Resident citizens.


This now ensures that the confusion caused by a lack of safeguards has been assuaged to an extent.


Conclusion


It can be said without an iota of doubt that the amendment was much awaited and the increase in the threshold of the sectoral cap will play a vital role in boosting the insurance industry in India. In the current times, the demand in the sector is multifold and in order to be able to stay in pace with the growth of the industry, the increase in the cap will assist private insurers to expand their companies. Further, owing to the fact that the industry is capital-intensive and the growth in the industry had reduced to 11-12% in 2020 as opposed to the 15-20% earlier, the influx of funds was much awaited.


The threshold increase does not merely assist the growth of the insurance sector but also serves the purpose of potentially increasing the GDP.


However, though the relaxation has been welcomed, it is not sufficient. Countries like China have relaxed the threshold for FDI in the insurance sector to a 100% which has enabled them to meet the global average contribution of the Insurance sector which is 7.23%.


In order for India to achieve the global average contribution percentage, the current relaxation may not be sufficient, nonetheless, it is the first step towards achieving it.

 
ga('require', 'ipMeta', { serviceProvider: 'dimension1', networkDomain: 'dimension2', networkType: 'dimension3', }); ga('ipMeta:loadNetworkFields'); ga('send', 'pageview');