Insurance reforms: Govt to further relax foreign investment rules while raising FDI limit to 100%

The government plans to further liberalise foreign investment rules for insurance companies by removing the condition that mandates the presence of Indian residents in the boards and top management of insurance entities.
In her Budget speech on Saturday, finance minister Nirmala Sitharaman announced the government would allow foreign entities to fully own insurance companies in India by increasing the foreign direct investment (FDI) limit from 74% to 100%. She added, “The current guardrails and conditionalities associated with foreign investment will be reviewed and simplified.”
The relaxed foreign investment rules, however, won’t affect the provision that allows a higher FDI investment level only to companies that invest their entire premium earnings in India. In an interview to Mint, Sitharaman clarified that while the government would stand firm on this condition, it would be open to reviewing anything else. Mint first reported in July that the government would review the rules on foreign investment in insurance companies to relax some stringent conditions.
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When working out the details of simplifying the FDI rules, officials said, the finance ministry will also consider liberalising conditions on dividend payouts and board composition that apply when foreign investment exceeds 49%.
Will FDI pour in? Maybe not.
The latest insurance reforms are aimed at bringing more foreign capital into the sector since only a few investors have used the benefits of the increase in FDI to 74% in 2021. Early last year, Zurich Insurance announced a proposal to acquire a 70% stake in Kotak Mahindra General Insurance for more than ₹5,500 crore. But in most other private joint-venture insurance companies, the FDI level is still close to the earlier FDI limit of 49%.
The government hopes increasing the FDI limit to 100% will lead to a sharp pick-up in investments, but an expert said this may not be the case. C R Vijayan, former secretary general, General Insurance Council, said, “The move to ease FDI conditions in insurance is unlikely to result in a sudden flow of FDI as even with 74% holding, very few overseas entities have come in or raised their investment in Indian insurance companies. But the move is good from the point of projecting a liberal investment climate in the country.”
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The department of financial services in the finance ministry is expected to begin consultations on evolving new FDI policy regulations for the sector soon. Speaking to Mint, economic affairs secretary Ajay Seth said some rules, such as the mandatory presence of Indians on company boards, have become irrelevant and will be reviewed.
Complex rules
Under the existing policy, foreign direct investment up to 74% is allowed in insurance companies under the automatic route, while 100% FDI is permitted for insurance intermediaries including insurance brokers, reinsurance brokers, insurance consultants and so on. Even in state-owned Life Insurance Company (LIC), 20% FDI is permitted under the automatic route.
However, insurance FDI is subject to stringent rules under the Indian Insurance Companies (Foreign Investment) Amendment Rules notified by the department of financial services, which say that for an insurance company with foreign investment, a majority of its directors and key management persons, and at least one among the chairperson of its board, its MD, and its CEO should be a resident Indian citizen.
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In addition, for Indian insurance companies with FDI exceeding 49%, about 50% of profit must be kept in reserve if a dividend has to be paid but the solvency margin is less than 1.2 times. The board should also have at least 50% independent directors if the chairperson is not an independent director, and 33% if the chairperson is an independent director. The government now proposes to amend these complex rules to level the field for foreign and domestic companies and build a competitive environment from which customers will benefit.
Slow but steady reforms
According to the finance ministry, the insurance sector received FDI worth ₹54,000 crore from 2014 to January 2024) owing to progressive liberalisation of FDI rules. The government opened up insurance to the private sector in 2000, with an FDI limit of 26%. This was increased to 49% in 2015 and to 74% in 2021.
Between 2014 and January 2024, the number of insurance companies increased from 53 to 70. Between FY14 and FY23, insurance penetration increased from 3.9% to 4% while insurance density rose from $52 to $92.
Insurance penetration and density are used to assess the level of development of the insurance sector. Insurance penetration is the percentage of insurance premiums to GDP, while insurance density is the ratio of premiums to the population (per-capita premium).
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