100% FDI Proposed For The Indian Insurance Sector: Key Implications And Next Steps

Introduction

On February 1, 2025, India's Finance Minister announced an increase in the foreign direct investment ("FDI") cap for the insurance sector from 74% to 100% as part of the Union Budget, 2025. This move was followed by a public consultation initiated by the Ministry of Finance in November 2024 on the Insurance Laws (Amendment) Bill, 2024 ("Bill"), which proposed several reforms, including the FDI limit hike. This decision marks a major step in the sector's liberalization and presents new opportunities for global insurers and investors. Once implemented, foreign entities may set up as insurers in India without forming joint ventures with Indian partners.

Evolution of FDI in India's Insurance Sector

The liberalization of India's insurance sector has taken place gradually, with key milestones shaping the regulatory landscape in the last decade:

• In 2015, the FDI cap was raised to 49% from 26%, allowing increased foreign participation while ensuring that control remained with Indian promoters.
• In 2021, the FDI limit was further increased to 74%, permitting foreign players to hold a majority stake while, inter alia, mandating that key management personnel and directors be Indian residents.
• In 2025, the government has now proposed 100% FDI in the insurance sector, allowing complete foreign ownership in insurance companies.

Key Condition of the FDI Increase
While raising the FDI ceiling to 100%, the announcement highlighted a key condition. It was clarified that the increased FDI limit applies to insurers who invest all premium collections within India. However, this condition seems ambiguous since the current legislation already mandates that policyholder funds must remain within the country,¹ while shareholder funds (profits post-dividends) do not have such restrictions. It remains unclear whether additional conditions will be introduced to reinforce this requirement.

Further, since insurers are already prohibited from investing policyholder funds outside India, it is possible that this requirement could be targeted at companies setting up operations in the Gujarat International Finance Tec-City (GIFT City) as International Financial Service Centre Insurance Office ("IIOs"), where regulatory frameworks are different, with the objective of promoting international financial services from India. In this context, certain incentives are already in place for IIOs that invest 100% of their retained premiums in India, under the IRDAI (Re-insurance) Regulations, 2018 ("Reinsurance Regulations"). These regulations prescribe an order of preference for Indian cedants (ceding non-life business), who must offer participation in reinsurance placements to different categories of reinsurers in the order prescribed. Earlier, IIOs were kept lower in the order of preference than a Foreign Reinsurer's Branch ("FRBs"). However, the Reinsurance Regulations were amended in 2023, and IIOs investing all their retained premiums in India are considered to be under 'Category 2' in the order of preference, at par with FRBs.

Implementation Process and Timeline

Several steps must be completed before the new FDI limit takes effect:

1. Amendments to the Insurance Act: The Insurance Act must be revised to reflect the increased FDI cap. This requires passing of the Bill in the Indian parliament, followed by the presidential assent and an official notification. As of now, the Bill has not been tabled in parliament and the process of enacting the same may require some time. The IRDAI has recently set up a committee to review insurance reforms under former SBI Chairman Dinesh Khara. The committee, which has held its first meeting, will recommend amendments to the Insurance Act, and is expected to submit its report in 3 months. Such recommendations and deliberations over the same are awaited, hence, the Bill may not be tabled anytime soon.

While the government had set a precedent of enacting changes relatively quickly to the FDI policy in 2021 when a similar increase (from 49% to 74%) was proposed in February, passed in March, and implemented by August, it is prudent to assess recent developments cautiously. The Bill has also recently faced resistance with public sector employee organizations and insurance agents' associations protesting against opening up the market completely to foreign insurers.

2. Regulatory Changes: Once the Bill is passed and the Insurance Act is amended, the Ministry of Finance will need to revise the Indian Insurance Companies (Foreign Investment) Rules, 2015. Similarly, the IRDAI will need to revise the IRDAI (Registration, Capital Structure, Transfer of Shares and Amalgamation of Insurers) Regulations, 2024, to align them with the amended statute.
3. Amendments to Foreign Exchange Laws: The lifting of the FDI limit will also require changes to the FDI Policy of India as issued by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, and amendments to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.

Other key reforms under the Bill

Apart from increasing the FDI limit, the Bill is proposing comprehensive changes to the insurance regulatory framework, which might require extensive deliberations in the parliament. The changes proposed include the following:

• Composite licensing – a composite licensing regime has been proposed, which would allow insurers to seek registration for more than one class of insurance business. By way of example, one insurance entity could obtain registration for health and life insurance business. This may trigger considerable restructuring in the insurance sector, with foreign promoters consolidating their insurance businesses in India into one entity.
• Wider scope of permitted activities – insurers may be permitted to undertake "services related or incidental to insurance business", which includes carrying out and transacting guaranty and indemnity business, and managing selling and realising of any property that may come into possession in the satisfaction of claims.
• Transfer of business to non-insurance company – insurers may be permitted to merge with non-insurers (which is not contemplated under current regulations).
• Reduction of minimum capitalisation and net owned fund requirements – the Bill proposes a significant reduction of the minimum paid-up equity capitalisation requirements for classes of insurance business serving underserved or special segments. Minimum capital for such classes is proposed to be INR 500 million (lower than the presently applicable INR 1 billion ). Additionally, the net owned fund required for foreign reinsurance branches and Lloyd's members has been reduced from INR 50 billion to INR 10 billion. The changes are expected to increase the inflow of FDI and increase insurance penetration in the country by encouraging small-sized insurers as well as foreign reinsurers to set up in India.
• Reduction of share transfer thresholds – prior approval of the IRDAI is proposed for any transfer or issuance of shares exceeding 5% of the capital of the insurer, instead of the current threshold of 1%.
• Insurance intermediaries – in a significant move, the Bill recognises managing general agents (MGAs) as a distribution channel for insurance. MGAs are specialised insurance brokers with the authority to underwrite a policy on behalf of the insurer. The MGA route promises to serve as a novel tool for enhancing insurance distribution capability.
• The Bill also seeks to introduce the concept of a one-time perpetual registration for insurance intermediaries and do away with the requirement of periodic renewals. This change, although expected to reduce the IRDAI's administrative workload, also has the potential to reduce the oversight currently enjoyed by the IRDAI. It is also proposed to permit insurance agents to enter into arrangements with multiple insurers in the same class of insurance business, which is not currently permitted.
• Online premium payments – as the wave of digital and online payments sweeps India and the globe, insurance premium payments are not immune to these developments. Policyholders have started preferring to pay premiums online, which the Bill seeks to recognise under Section 64VB of the Insurance Act. In such cases, risk is to be assumed only upon the receipt of the money in the insurer's bank account.
• Increasing penalties – insurers and insurance intermediaries could be liable to enhanced penalties of up to INR 100 million for non-compliance with the Insurance Act and regulations. This is a significant increase from the present maximum penalty of INR 10 million and reflects the IRDAI's intent not to compromise on compliance matters.

FDI linked conditions and other regulatory changes

Even if the Bill were to be tabled in the parliament, it will need to be seen as to what conditions are attached to the increase in FDI limit. Previously, when the FDI limit had increased from 26% to 49%, it came with an added conditionality that all insurance companies should be 'Indian owned and controlled'. As a result, many foreign investors were required to dilute their existing rights to ensure compliance with the 'Indian control' criteria.

While certain foreign investors did increase their shareholding in insurance companies, however, the 'Indian control' requirement disincentivised many investors. In April 2021, the FDI limit was further increased from 49% to 74%. While the 'Indian owned and controlled' requirement was done away with in July, 2021, the increase in FDI limit to 74% came with certain additional conditions for insurance companies with more than 49% of foreign investment, which, inter alia, included at least 50% of the net profit for the financial year to be retained by the insurance company, in its general reserve, if: (A) for such financial year, dividend is paid on equity shares; and (B) at any time during the financial year, its solvency margin is less than 1.2 times the control level of solvency; and at least 50% of its directors to be independent directors. If, however, the chairman of the board of directors is an independent director, only one-third of the board of directors will need to consist of independent directors.

Similarly, when FDI increased in 2019 to 100% for insurance intermediaries, additional conditions were imposed for insurance intermediaries with majority shareholding of foreign investors and such requirements were seen as onerous by many foreign investors and despite liberalization, the sector did not see much traction or inflow of foreign investment. The eventual success of 100% FDI in insurance companies will depend upon how well the regulatory framework supports this transition and the practicality of any conditions imposed on foreign investors and insurance companies.

Key FDI Implications

The decision to permit 100% foreign investment in insurance could be transformative for the industry. Three key implications stand out:

• Easier Market Entry for Foreign Insurers: The removal of the requirement for a domestic partner lowers entry barriers, potentially attracting new international players.
• Expanded Private Equity Participation: Up until now, private equity investors faced restrictions since only 74% FDI was permitted for insurance companies, and the other 26% had to be locally controlled. With full foreign ownership now permitted, investors can directly back professional management teams without needing Indian partners.
• Restructuring of Existing Joint Ventures: The new policy may prompt discussions between current foreign insurers and their local partners regarding strategic realignment. While not all joint ventures will dissolve, foreign insurers might explore acquiring full ownership, and local partners with strong distribution networks could attract heightened interest.

Conclusion

The increase in FDI limits is a significant step toward expanding insurance penetration in India. However, to maximize its impact, the government will have to expedite the legislative and regulatory changes necessary for implementation, while also balancing the considerations raised against the Bill. To align with the broader vision of "Insurance for All" by 2047, and to unlock the full potential of this policy shift, the government will have to undertake swift execution of these reforms.

Footnote

1 Section 27E of the Insurance Act, 1938 ("Insurance Act").

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