Following the Insurance Laws (Amendment) Act 2015 (Amendment Act), the Indian insurance industry has witnessed the introduction of several new regulations and modification to existing guidance, with several more changes on the anvil.
The most significant change under the Amendment Act was the increase in the foreign investment limits for Insurers and insurance intermediaries from 26% to 49% of the paid-up share capital. The Amendment Act also required that all companies operating in the Indian insurance sector were required to be "Indian owned and controlled". In order to implement the framework for increasing the foreign investment limits, the following were introduced in quick succession:
- The Indian Insurance Companies (Foreign Investment) Rules 2015 (Foreign Investment Rules) which inter alia provided that any foreign investment in companies operating in the Indian insurance sector beyond 26% and upto 49% of the paid-up share capital of the respective companies shall be under the 'approval route' and shall require the prior approval of the Foreign Investment Promotion Board (FIPB);
- The changes set out in the Foreign Investment Rules were also reflected in the Consolidated FDI Policy (FDI Policy) of 12th May 2015, issued by the Ministry of Commerce and Industry;
- The IRDAI notified the Guidelines on 'Indian owned and controlled' (Guidelines) on 19th October 2015. The Guidelines further developed the requirement of 'Indian owned and controlled' set out within the Amendment Act and provided some much needed clarity in this regard.
Following the introduction of the Foreign Investment Rules several applications were made to the FIPB, some of which have been approved and some of which are still pending approval. However, it now appears that the requirement to obtain FIPB approval for investments in the insurance sector in excess of 26% and up to 49% may be removed shortly. In the annual budget of 2016-17 presented in the Indian Parliament by the Finance Minister on 29th February 2016 the reforms announced, include the following:
"Foreign investment will be allowed in the insurance and pension sectors in the automatic route up to 49% subject to the extant guidelines on Indian management and control to be verified by the Regulators"
It is, therefore, proposed that foreign investment in the insurance sector up to 49% will be under the automatic route (ie without the requirement to obtain FIPB approval) provided that the guidelines on Indian management and control will continue to apply.
In the event that the regulatory changes proposed in the annual budget are implemented and the Foreign Investment Rules, the FDI Policy, the Guidelines and other relevant rules and regulations are amended to that effect, it will be a massive boost for investment in the insurance sector. However, the manner in which the investment proposals already approved by the FIPB will be dealt with and the manner in which the IRDAI (which may become the sole regulatory body with respect to the insurance sector) handles the foreign investment proposals remains to be seen. Needless to state, the entire insurance industry and several potential investors are closely observing the rapid developments in this space.
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