DIPP Operationalizes Insurance FDI Reforms

The Government had earlier begun
the process of enhancing foreign direct investment (FDI) in the insurance
sector by increasing the investment cap from 26% to 49%. Given the political
stalemate in the Parliament’s legislative process, the Government had initiated
the reforms in December 2014 through the promulgation of the Insurance
Laws (Amendment) Ordinance, 2014
. Subsequently, the Finance Ministry also
issued the Insurance
Companies (Foreign Investment) Rules, 2015
in order to incorporate the
amendments above (see press release).
In the same vein, yesterday the
Department of Industrial Policy and Promotion (DIPP) issued the Press
Note No. 3 (2015 Series)
that operationalizes the revised FDI norms in the
insurance sector. Pursuant to these reforms, foreign investment is allowed in
this sector up to 49%, which is an aggregate limit for all forms of foreign
investment (whether through the direct or portfolio routes). Automatic approval
is available for foreign investment up to 26%, beyond which it is necessary to
obtain the approval of the Government. Given that foreign investors are allowed
to hold only a minority stake, there is considerable emphasis on “control”
requirements, whereby “ownership and control [must remain] at all times in the
hands of resident Indian entities”. This is similar to the position that ensues
in the civil aviation sector (for air transport services) where a cap of 49%
exists for foreign investment.
The increased foreign investment
cap in the insurance sector has been long pending. It is likely that these
changes will see further investment into this sector, and this may also trigger
a round of consolidation in the industry through mergers and acquisitions.
However, given that the current reforms are premised on an Ordinance, it will
be interesting to see if companies will act upon this regime or await
legislation from Parliament. In any event, the introduction of the Bill in
Parliament is imminent.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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