The Government of India notified the Foreign Exchange Management (Non-debt Instruments) (Second Amendment) Rules, 2020 (“Non-Debt Rules Second Amendment”) on April 27, 2020, amending the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. With this amendment, foreigners can now look to acquire 100% stake in an insurance intermediary, subject to verification by the Insurance Regulatory and Development Authority of India (IRDAI). This amendment was much awaited by insurance intermediaries, which have in the past lobbied to be declassified from the same bracket as insurance companies, in so far as foreign investment was concerned.
(i) Developments preceding the Non-Debt Rules Second Amendment
The FEMA notification was long awaited, ever since the Department of Financial Services, Ministry of Finance, Government of India, notified the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2019 (“Amendment Rules”), on September 2, 2019. This was the first set of changes to foreign investment norms, applicable to insurance intermediaries. However, the Amendment Rules came almost two months after the announcement of opening the sector was made in the Budget speech made in July, 2019.
The Amendment Rules prescribed amendments to the primary piece of regulation for foreign investment in the Indian insurance sector – the Indian Insurance Company (Foreign Investment) Rules, 2015 (“Foreign Investment Rules”). By way of the Amendment Rules, the Government of India allowed insurance intermediaries to be 100% foreign owned and controlled, but with conditions regulating a majority foreign shareholder’s ability to appoint managerial personnel, reconstitute the board of directors, and draw out funds from the insurance intermediary company. To give an example, the Amendment Rules require all insurance intermediaries with majority foreign investment to, inter alia, undertake the following:
- take prior permission of the IRDAI for repatriating dividend;
- make payments to the foreign group or promoter or subsidiary or interconnected or associate entities, beyond what is necessary or permitted by the IRDAI; and
- ensure that the composition of the Board of Directors and key management persons is as specified by the concerned regulators.
As one can note from the above, the Department of Financial Services, Ministry of Finance did not detail the substance of the restrictions applicable to majority foreign owned insurance intermediaries. Such power was, in turn, vested with the IRDAI. The IRDAI did rise to the occasion, and on October 30, 2019, it notified the IRDAI (Insurance Intermediaries) (Amendment) Regulations, 2019 (“IRDAI Amendment Regulations”), an omnibus amendment to the following regulations, for allowing 100% foreign investment in insurance intermediaries:
- IRDAI (Insurance Brokers) Regulations, 2018
- IRDAI (Insurance Web Aggregator) Regulations, 2017
- IRDAI (Registration of Insurance Marketing Firm) Regulations, 2015
- IRDAI (Registration of Corporate Agents) Regulations, 2015
- IRDAI (Insurance Surveyors and Loss Assessors) Regulations, 2015
- IRDAI (Third Party Administrators –Health Services) Regulations, 2016
The key substance of the IRDAI Amendment Regulations can be summed up as follows:
- The amendment removes all provisions in the above enlisted regulations, which required insurance intermediaries to be Indian owned and controlled; and
- The amendment introduces an obligation for majority foreign owned insurance intermediaries to file an undertaking in the form provided in Schedule AA of the IRDAI Amendment Regulations.
However, it is not as simple as it sounds. The undertaking in Schedule AA set out certain conditions in relation to management and control of insurance intermediaries, which all insurance intermediaries with majority foreign ownership are required to comply with. These conditions are as follows:
(i) An Indian citizen is appointed as the Chairman of the Board of Directors or the Chief Executive Officer/ Principal Officer/ Managing Director of the insurance intermediary.
(ii) Dividends can be repatriated by the insurance intermediary only with the prior permission of the IRDAI.
(iii) The insurance intermediary brings in the latest technological, managerial and other skills.
(iv) Payments (other than dividend) made by the insurance intermediary to related parties, taken as a whole, do not exceed 10% of the total expenses of the insurance intermediary in a financial year.
(v) Indian citizens constitute a majority of the directors on the Board and key management persons of the insurance intermediary.
Hence, by way of Schedule AA of the IRDAI Amendment Regulations, the IRDAI supplied substance to the restrictions prescribed by the Amendment Rules as discussed above.
The IRDAI Amendment Regulations were soon followed by an IRDAI circular on November 19, 2019, which sought to clarify that the Guidelines for Indian Owned and Controlled (issued by the IRDAI on November 11, 2015 to insurance companies and insurance intermediaries) were no longer applicable to insurance intermediaries. The said Guidelines had become redundant in as much as insurance intermediaries were concerned because of the issuance of the IRDAI Amendment Regulations. With this circular, it became clear that the only restrictions applicable to the management of insurance intermediaries (which had majority foreign investment), were those specified in Schedule AA of the Amendment Regulations.
However, post November 19, 2019, the gates for 100% foreign investment in insurance intermediaries were still kept shut. The Reserve Bank of India and the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India, were yet to notify the necessary amendments to the FEMAA regulations and the Consolidated Foreign Direct Investment Policy of 2017 (“FDI Policy”), respectively, to allow 100% foreign investment in insurance intermediaries. Between these regulators, the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India, took the first initiative to notify the necessary amendments to the FDI Policy by issuing Press note 1 of 2020 (“PN 1”) in February this year. The press note lifted the sectoral caps for foreign investment in insurance intermediaries and reiterated the same terms as the Amendment Rules.
Interestingly, on October 17, 2019, the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017 was superseded by the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“Non-Debt Rules”). The Non-Debt Rules were issued by the Department of Economic Affairs, Ministry of Finance, Government of India. Even though the Non-Debt Rules were issued by the same Ministry of the Government of India, around a month after the notification of the Amendment Rules, the Non-Debt Rules, quite strangely, continued to prescribe a 49% sectoral cap for foreign investment in insurance intermediaries. The Non-Debt Rules were subsequently amended on December 5, 2019, by way of the Foreign Exchange Management (Non-Debt Instruments) (Amendment) Rules, 2019. However, strangely again, the said amendments also did not revise foreign investment caps for insurance intermediaries.
Fast forward to April 27, 2020, close to three months after the first amendment to the Non-Debt Rules, the Department of Economic Affairs of the Ministry of Finance, Government of India has finally revised the sectoral caps for insurance intermediaries to allow for 100% foreign investment in insurance intermediaries by issuing the Non-Debt Second Amendment. With this, the flood gates for further foreign investment in insurance intermediaries have been fully opened, probably at the right time, given the impact of COVID-19 and the severe need for a stimulus to foreign investment activity.
(ii) What is new in the Non-Debt Rules Second Amendment?
It is pertinent to mention that for the financial services sector, FEMA and FDI policies seek to defer to sectoral regulators (such as IRDAI and SEBI) for prescribing foreign investment sectoral conditions for the constituents of the relevant sector. Hence, for insurance intermediaries, PN 1 and the Non-Debt Rules Second Amendment largely reiterate the requirements prescribed in the Amendment Rules and the IRDAI Amendment Regulations, while maintaining some conditions that were historically there in the FDI policy and the erstwhile FEMA regulations, such as the clarification in relation to applicability of other sectoral norms to entities (such as banks) that were engaged in insurance intermediation as a secondary business.
That said, it is pertinent to mention that the amendments made by way of PN 1 and Non-Debt Rules Second Amendment, continue to provide that all foreign investments in insurance intermediaries will be subject to “verification” by the IRDAI. This verification requirement had always been a part of the Foreign Investment Rules, erstwhile FEMA regulations and the FDI policy. However, the Foreign Investment Rules, erstwhile FEMA regulations and the FDI policy, did not seek to clarify the meaning of the term ‘verification’ – whether the same qualified as a prior approval of the IRDAI for foreign investment or a simple notification to the IRDAI. The answer to this question was always simple in case of transactions, which trigger IRDAI prescribed thresholds for taking prior approval of the IRDAI. For example, for insurance brokers, the IRDAI (Insurance Brokers) Regulations, 2018, clearly specify that insurance brokers shall seek prior IRDAI approval for any transfer of shares or issue of equity capital that would result in: (a) the total paid-up capital holding of the transferee in the shares of the insurance broker to exceed 20% of the insurance broker’s paid up capital; or (b) the nominal value of the shares intended to be transferred by an individual, or, group, constituents of a group or body corporate under the same management, jointly or severally exceeds 10% of the paid up capital of the insurance broker.
However, the meaning of the term “verification” is unclear for: (a) foreign investments that do not trigger any IRDAI prescribed thresholds; and (b) foreign investments in intermediaries that are only required to be notified to the IRDAI post completion of the investment (this is true in case of insurance surveyors and loss assessors). In all such cases, one may take a view that the reference to “verification” only seeks to cover transactions for which the IRDAI itself has prescribed a prior approval and verification requirement will be redundant in case of investments for which IRDAI approval is otherwise not required under the applicable regulations. However, the possibility of the IRDAI reading the verification requirement to mean prior notification, prior consultation or even a prior approval cannot be ruled out, in which case foreign investors will continue to remain subject to transactional uncertainty.
 The changes to the foreign investment norms applicable to insurance intermediaries, also extend to insurance web aggregators, even though they have not been expressly included within the definition of “intermediary”/ “insurance intermediary” prescribed under the Insurance Regulatory and Development Authority Act, 1999.
 See: https://corporate.cyrilamarchandblogs.com/2019/07/budget-2019-liberalisation-foreign-investment-insurance-brokers/ for further details on the changes that were required to be made for giving full effect the proposal made in the budget announcement.