Before 1999, the insurance sector in India was nationalized. No private sector or foreign insurance companies were allowed. In 1999, the insurance law was amended, opening the market to private firms as well as joint ventures with foreign partners. The amended law permitted foreign direct investment (FDI) only up to 26% in an Indian insurance company. An Indian insurance company is defined in the Act to include only those firms whose sole purpose is to carry on life insurance business or general insurance or reinsurance.
A proposal is pending before Parliament to amend the Act to permit FDI up to 49% in place of the current 26%. Hence, the time is ripe to analyse if there are any gaps in our legal or regulatory framework relating to FDI in insurance.
The Foreign Investment Promotion Board (FIPB) offers a single window clearance for FDI proposals. Under FIPB guidelines, FDI in the insurance sector is allowed under the automatic route subject to the condition that the companies bringing in FDI obtain the necessary licence from the Insurance Regulatory and Development Authority (Irda) for undertaking insurance activities.
While the Insurance Act allows FDI in an Indian insurance company, the FIPB seems to have widened the scope of FDI to permit FDI in the insurance sector and insurance activities.
That is not all. While the FIPB stipulates that entities carrying on insurance activities must have an Irda licence, Irda has licensing requirements and regulations only for insurance companies, agents, brokers, third-party administrators (TPAs), surveyors and loss assessors and web aggregators.
In the case of brokers and TPAs, Irda regulations lay down minimum capital requirements. In the case of corporate insurance agents, capital requirements have been laid down only for companies set up to do exclusively insurance agency business. In the case of corporate surveyors, no capital requirements have been laid down. In the case of Web aggregators also, no capital requirements have been laid down but minimum net worth requirements have been laid down.
Here again, the FDI rules of Irda vary from intermediary to intermediary. In case of insurance brokers and TPAs, Irda’s reckoning of 26% FDI is in line with the Insurance Act’s provisions relating to FDI in insurance companies.
In the case of corporate agents and corporate surveyors and loss assessors there could, in reality, be 100% foreign-owned corporate agents and surveyors (or franchisees) in India. Some foreign banks may hold or may have held corporate insurance agency licences. There may also be corporate agents who could be subsidiaries of foreign insurance related and other entities. For example, Berkshire India, a corporate insurance agent, is shown as a majority owned subsidiary of Berkshire Hathaway Inc.
It is not clear whether 100% foreign-owned or majority foreign-owned corporate insurance agents or corporate surveyors are permissible in India, notwithstanding the 26% FDI cap in the Insurance Act. If 100% foreign investment or majority ownership is already permitted by FIPB in the insurance sector, then the purpose of the proposed amendment to the Insurance Act for increasing the FDI limit to 49% is not clear.
A close look at the insurance-related issues discussed in the meetings of the FIPB gives an impression that in some cases FDI in the insurance sector may not fall under the automatic route.
Insurance consultants could be another area of concern. Insurance consultants are included in the definition of insurance intermediary under the Irda Act. But there are no Irda regulations governing such consultants. However, some global insurance and reinsurance entities have incorporated consultancy companies in India. It is not clear whether the insurance consultants fall under the automatic route or require specific approval of the FIPB.
FIPB has stipulated reporting of FDI, which is fairly comprehensive. However, any regulatory gaps or ambiguities can give opportunities to firms to leverage on the gaps and remain unscrutinized for a length of time. It is essential to identify and rectify regulatory gaps and arbitrages.
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K. K. Srinivasan is a former member of Insurance Regulatory and Development Authority.