Tuesday, March 3, 2015

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.

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