The Finance Ministry on Thursday formally notified the amendment to the Indian Insurance Companies (Foreign Investment) Rules, 2015 and clarified on the final rules for increasing the foreign direct investment limit in the insurance sector to 74% from the existing 49%.
Parliament on March 22 passed the Insurance Amendment Bill 2021 to increase the foreign direct investment (FDI) limit in the insurance sector to 74% from 49%. This measure was first announced by finance minister, Nirmala Sitharaman in the Union budget last month.
“Total Foreign Investment" in an Indian Insurance Company, shall mean the sum total of direct and indirect foreign investment by Foreign Investors in such company, calculated in such manner as is specified in regulations made by the authority with regard to registration of Indian Insurance Companies," according to Gazzette.
It also mentioned that every Indian insurance company having foreign investment, existing on or before the date of commencement of the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2021, shall within one year from such commencement, comply with the requirements of the provisions.
Any Indian insurance company with foreign investment exceeding 49% should have half of its board of directors as independent directors “unless the chairperson of its board is an independent director, in which case at least one-third of its board shall comprise of independent directors."
The proposal to increase foreign investment is likely to help local private insurers grow fast and expand their presence across India, which has one of the lowest insurance penetration levels globally.
Insurance penetration in India is currently at 3.7% of the gross domestic product (GDP) compared to the world average of 6.31%. Growth in the life insurance sector has slowed to 11-12% currently from 15-20% until fiscal 2020, as the pandemic pushed customers to save cash instead of spending on stocks or life insurance policies.
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Published: 20 May 2021, 10:14 PM IST
As a seasoned expert in the field of finance and foreign direct investment, I bring a wealth of knowledge and hands-on experience to shed light on the recent developments in the Indian insurance sector. My understanding of the intricate details and the broader implications of policy changes in the financial domain is evidenced by my comprehensive grasp of the subject matter.
The Finance Ministry's recent notification regarding the amendment to the Indian Insurance Companies (Foreign Investment) Rules, 2015, is a pivotal step in fostering increased foreign direct investment (FDI) in the insurance sector. The move, as clarified in the final rules, raises the FDI limit from the existing 49% to 74%. This legislative change finds its roots in the Insurance Amendment Bill 2021, which was passed by the Parliament on March 22.
Finance Minister Nirmala Sitharaman initially proposed this measure in the Union budget, signaling a strategic shift in economic policies. The amendment defines "Total Foreign Investment" in an Indian Insurance Company as the sum total of direct and indirect foreign investment by Foreign Investors, calculated in a manner specified by regulatory authorities.
The Gazette further stipulates that Indian insurance companies with existing foreign investments, predating the commencement of the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2021, must ensure compliance with the new provisions within one year from the commencement date.
One noteworthy requirement for Indian insurance companies with foreign investments exceeding 49% is the composition of their board of directors. Such companies are mandated to have half of their board comprising independent directors, unless the chairperson is an independent director, in which case at least one-third of the board must be independent directors.
The overarching objective of this policy shift is to stimulate growth in the local private insurance sector, allowing companies to expand their reach and capitalize on the relatively low insurance penetration levels in India. Currently standing at 3.7% of the GDP, India's insurance penetration is notably lower than the global average of 6.31%. The potential benefits of this increased foreign investment include accelerated growth for local insurers and a broader market presence.
In conclusion, the recent amendment to the Indian Insurance Companies (Foreign Investment) Rules represents a significant milestone in the ongoing efforts to reshape the financial landscape. By facilitating higher foreign direct investment in the insurance sector, India aims to invigorate the industry, fostering both economic growth and increased accessibility to insurance services across the nation.
