India: 49% FDI In Insurance: Finally?

In his Budget Speech of 10^th July 2014, the Finance Minister, Mr Arun Jaitley, made the following statement in relation to FDI in the insurance sector:

The insurance sector is investment starved. Several segments of the insurance sector need an expansion. The composite cap in the insurance sector is proposed to be increased up to 49% from the current level of 26% with full Indian management and control, through the FIPB route.

The decision to raise the permitted foreign investment in the insurance sector to 49% from 26% has been spoken of for a number of years now and this announcement is the latest in a chain of events which commenced more than 2 decades ago:

1991: The Government's industrial policy began the liberalisation of the Indian economy and paved the way for private participation in the insurance sector.

1993-94: The Malhotra Committee was set up by the Indian Government to review the structure of the regulation and supervision of the insurance industry, and to suggest reforms. The Committee recommended, inter alia, that private players be permitted to enter the insurance industry and that overseas Insurers be permitted to enter the Indian market by forming joint ventures with Indian partners.

1999: The Insurance Regulatory & Development Authority ("IRDA") is established as an autonomous body to regulate the insurance industry and to develop the insurance market.

2000: Private competition was permitted, including foreign investment but with a foreign ownership cap of 26%.

2004: The Congress coalition government proposed raising the foreign investment cap from 26% to 49%, but met with strong opposition and the government found it difficult to push through the increase.

2008: The Insurance Laws Amendment Bill 2008 ("Insurance Bill") is finally introduced by the Congress coalition government. It seeks to raise the foreign investment limit to 49%.

2013: The coalition government liberalised FDI schemes in the insurance sector with a decision to increase the permitted FDI to 49%. However, this decision could not be implemented until the Insurance Bill was passed by the Indian Parliament. This decision was met with widespread approval by the Indian insurance market, but due to a vocal lack of support from opposition parties, the Insurance Bill was not introduced in Parliament during the tenure of the UPA government.

Given that the Insurance Bill and particularly the proposed increase of FDI in the insurance sector to 49% has been heavily opposed by opposition parties for several years now, it was nonetheless one of the proposals set out by the new BJP government in India in the very first Budget introduced by the government. There has already been widespread public reaction to this proposal and Indian business houses and foreign investors are, in all likelihood, going to largely welcome the implementation of this proposal. However, while the implementation of this proposal is widely welcomed and anticipated, the following should be considered:

• The proposal will only come into effect when both Houses of Parliament pass the Insurance Bill. While the previous coalition governments were unable to forge a consensus with opposition parties and, therefore, the Insurance Bill remained pending, the present government has a majority in Parliament and would probably not face this difficulty in introducing the Insurance Bill in Parliament. In addition, until recently, the Insurance Bill was not viewed as a first level priority as the significant amendments to the Companies Act were also pending. With the passing of the Companies Act 2013, it appears that the Insurance Bill may now be considered a priority.

• The Finance Minister's Budget Speech specified that the increase in FDI would be coupled with "full Indian management and control" indicating that overseas investors would not have significant management rights or controls. This statement follows press reports over the last couple of days which indicated that a draft Cabinet note of 27^th June 2014 had been prepared by the Finance Ministry to amend the Insurance Bill and introduce some "safeguards/restrictions" while enhancing the FDI cap. While the content of this note has not been made public, it is anticipated that the restrictions may include: (a) limiting the voting rights of an overseas partner to 26%, even if that partner has a 49% shareholding; (b) requiring the majority of the company's directors to be Indian nationals; and (c) not allowing foreign shareholders to have any say in the appointment of the CEO.

• In earlier press reports, there was also indications that the new government was intending to raise the foreign investment cap for the insurance sector to 49% with the following riders:

• There is also no clarity presently on whether the FDI limit of 49% would be uniformly extended to all insurance intermediaries at the same time as insurance companies. This is of particular concern to some insurance intermediaries who are presently in the process of reducing their existing foreign investment to 26% following clarifications issued by the IRDA and the DIPP over the course of the last year.

It is anticipated that raising the FDI limits in the insurance sector to 49% will result in a FDI inflow of Rs.5,000-6,000 crores (cUS$1 billion) immediately after the cap is raised. However, until the Insurance Bill is introduced and passed by Parliament, it is difficult to anticipate whether the restrictions the Government is proposing to introduce will have the impact of actually reducing this anticipated inflow of foreign capital.