Liberalisation of FDI In Insurance Companies – A look at the step(s) taken since the Big Budget Announcement

The industry is now well versed with the move to liberalise foreign direct investment (“FDI”) in Indian insurance companies to 74%, from the existing cap of 49%. The announcement was first made by the Finance Minister Ms. Nirmala Sitharaman on February 1, 2021, as part of her Budget presentation. The move followed the raise in FDI limits to 100% in insurance intermediaries, which was announced by Ms. Sitharaman in July 2019 and effected in September 2019.

It appears that the government is now acting swiftly with the legislative changes to effect the proposal to increase FDI in insurance companies to 74%. Both houses of the Indian Parliament recently assented to the Insurance (Amendment) Bill, 2021 (“Amendment Bill”), to amend the Insurance Act, 1938 (“Insurance Act”). The Rajya Sabha passed the Amendment Bill on March 18, 2021, while the Lok Sabha passed the Amendment Bill on March 22, 2021.

The Amendment Bill has brought about changes to the definition of an “Indian Insurance Company” as provided in the Insurance Act. It now clarifies that an “Indian Insurance Company” means any insurer, being a company, which is limited by shares, and, – 

“ …

(b)     in which the aggregate holdings of equity shares by foreign investors including portfolio investors, do not exceed seventy-four per cent of the paid-up equity capital of such Indian insurance company, and the foreign investment in which shall be subject to such conditions and manner, as may be prescribed.


The Amendment Bill also brings changes to Section 114(2)(aaa) of the Insurance Act whereby, the Central Government retains its power to make rules, but now in relation to “… the conditions and manner of foreign investment …”. As per the “Memorandum regarding Delegated Legislation” as attached to the Amendment Bill “the matter in respect of which the rules may be made are matters of procedure and administrative details, and as such, it is not practicable to provide for them in the proposed Bill itself, the delegation of legislative power is, therefore, of a normal character.” The Central Government therefore reserves its ability to make rules on any and all matters in relation to foreign ownership and control in insurance companies.

Pursuant to the 49% cap, Indian insurers were required to ensure that the control over their affairs and management are vested with Indian promoters. To this effect, the IRDAI permitted foreign investors to retain only such rights, which were protective in nature, and which did not impede the day-to-day operations of the insurer. In a similar spirit, Ms. Sitharaman had made it clear that foreign ownership and control of insurance companies as per the increased FDI limits shall be allowed “with safeguards” and unsurprisingly, the statement of objects and reasons to the Amendment Bill also states that the increase of FDI limit to allow foreign ownership will be subject to “safeguards”. However, unfortunately, the Amendment Bill itself does not shed any light on the actual nature of safeguards proposed to be implemented under the liberalised regime.

While making the announcement, Ms. Sitharaman was quoted as saying: “under the new structure, the majority of directors on the board and key management persons would be resident Indians, with at least 50 per cent of directors being independent directors, and specified percentage of profits being retained as general reserves”. Further, considering the foreign investment conditions applicable to private sector banks and insurance intermediaries, some of the other “safeguards” may include restrictions on related party transactions between the insurance companies and the foreign investor(s) (or their group companies) as well as prior approval requirements in relation to the insurance company’s ability to pay dividends to its shareholders. In any event, stakeholders will need to wait and watch for the rules that may be issued. It will be interesting to see whether the rules adhere strictly to the safeguards as hinted by Ms. Sitharaman in her Budget speech or whether their scope may be expanded, given the regulatory regime surrounding other financial service providers.

Like it or not, the changes to the Insurance Act are only one of the many modifications required to be made to the extant regulatory framework to effect the Big Budget Announcement. These other changes which are required are as follows: (i) amendment to the IRDAI (Registration of Indian Insurance Companies) Regulations, 2000, (ii) amendment to the Indian Insurance Companies (Foreign Investment) Rules, 2015, issued by the Department of Financial Services, Ministry of Finance, Government of India, (iii) amendments (or repeal) of the Guidelines on Indian Owned and Controlled, dated October 19, 2015, issued by the IRDAI (iv) amendment to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, issued by the Department of Economic Affairs, Ministry of Finance, Government of India and (v) Amendment of the Consolidated Foreign Direct Investment Policy of India, issued in 2020 by the Department for Promotion of Industry and of Internal Trade, Ministry of Commerce and Industry, Government of India. Amendment to the Insurance Act is just the first step, but a step well taken, no doubt.