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

Summary
- DFS secretary M Nagaraju said on Monday that the insurance reforms bill would be introduced in the ongoing budget session of parliament.
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, said top finance ministry officials. The insurance reforms bill will be introduced in the ongoing budget session of parliament, one of these officials said.
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 offers a higher FDI limit only to companies that invest their entire premium earnings in India. In an interview with Mint and HT, Sitharaman clarified that while the government would stand firm on this condition, it would be open to reviewing anything else.
Ajay Seth, secretary at the department of economic affairs (DEA) said some rules such as the mandatory presence of Indians on company boards, have become irrelevant and will be reviewed.
The Department of Financial Services (DFS), under the finance ministry, is expected to begin consultations on evolving new FDI policy regulations for the sector soon.
"We will review provisions related to appointment of chairman, repatriation of dividends, etc. It will be part of an amendment to the rules that will be carried out separately after the review," said DFS secretary M Nagaraju. He also said on Monday that the insurance reforms bill would be introduced in the budget session of parliament.
Also read | Andy Mukherjee: India has slashed income tax but still needs to snip red tape
When working out the details of simplifying the FDI rules, the 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, 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 experts are divided on this. Pallavi Malani, India leader-insurance practice at BCG, said, “Some foreign players may want to participate in a larger way in the India growth story with this relaxation of FDI norms, and hence there may be some change in existing JV structures." The industry is likely to see heightened investments and M&A activities in the coming months, she said.
Also read: Insurance FDI hike may spur capital inflows of up to $12 billion
However, C R Vijayan, former secretary general of the 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."
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.
Also read | The big post-budget interview: FM says she wanted to ‘honour the taxpayer’
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.
Bill to be introduced in budget session
The Insurance Laws (Amendment) Bill has been approved by the finance ministry and will be introduced in the ongoing budget session of parliament, financial services secretary M Nagaraju said during a media interaction on various budget proposals on Monday.
He said the final draft of the amendment bill was being vetted by the law ministry and would soon be sent for cabinet approval. “We expect to introduce the bill in the budget session, probably after the session reconvenes later. The government wants to make the changes as quickly as possible," Nagaraju said.
He said the amendment bill would encompass changes to three different laws – the Insurance Act, LIC Act and IRDA Act – and provide more autonomy to the insurance regulator and LIC on making appointments, setting up offices and other staff-related matters.
Reforms in the insurance sector include – apart from permission for 100% FDI – provisions for a composite licence, lower entry barriers for companies, simplified investment rules, and more power for the regulator to determine the licence-fee structure for companies.
With a composite licence, a single entity will be able to offer both life and non-life products. Currently these two activities have to be carried by separate corporate entities. Composite insurers are also allowed in jurisdictions such as Singapore, Malaysia, and the UK.
Also read: Budget strengthens the backbone of India’s consumer economy
The draft bill also suggests giving the Insurance Regulatory and Development Authority (IRDAI) the power to decide lower licensing conditions for smaller companies or single-product insurance entities. Accordingly, the draft bill removes the capital-requirement clause from the legislation and instead gives IRDAI the power to determine capital requirements of companies in consultation with the government.
A differential licensing regime will allow micro-insurers, currently deterred by high capitalisation requirements, to offer affordable insurance cover in rural areas and to low-income people. It also introduces the concept of a ‘captive insurer’ – a general insurance company undertaking business exclusively for its holding, subsidiary, or associate companies. This will likely allow conglomerates and corporate groups to incorporate an insurer to cover internal business-related risks.
Global best practices
The bill will bring far-reaching reforms to the insurance sector and help increase insurance penetration in the country, said an official of a global audit and consultancy firm, who did not wish to be named as the bill remains under discussion.
The amendment bill also brings in several other changes, including simplified investment conditions, reduced net-owned fund requirements for foreign reinsurers, differential solvency margin, and putting insurance companies at par with banks regarding share-transfer approval. The bill also proposes to remove limits on commission payments.
Also read | Centre will sustain capex: Expenditure secretary Manoj Govil
Nagaraju said the proposal on 100% FDI in insurance will bring India at par with Canada, Brazil, Australia and China. “Aligning India's FDI norms with global best practices will position the country as an attractive destination for foreign investors. More players in the market will enhance competition, resulting in better products, improved customer service, and more affordable premiums, ultimately improving insurance penetration and density. It will also help attract long-term growth capital, help insurers invest in emerging technology, enhance distribution channels, improve competitiveness, attract global players, and generate employment opportunities."
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).