Rules for insurance firms’ control tweaked after FDI ceiling raised to 74%

Insurance law concept. Wooden gavel in the court.  

Indian promoters of insurance joint ventures with foreign partners will no longer be able to nominate a majority of the board members, as per the new rules notified under the Insurance Act. This follows the recent amendments to enhance the foreign direct investment (FDI) limit in the sector to 74% from 49%.

However, a majority of board members, key management persons (KMP) need to be resident Indian citizens, as should at least one of the three top positions — the chairperson of the board, the MD and CEO.

Applies to all JVs

This new norm will apply to all insurers, irrespective of the stake held by the foreign partner, said legal experts. The Finance Ministry has also specified further conditions on the composition of the board for firms where foreign investors’ stake exceeds 49%.

“In an Indian insurance company having foreign investment exceeding 49%, not less than 50% of its directors shall be independent directors, unless the chairperson of its board is an independent director, in which case at least one-third of its board shall comprise independent directors,” state the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2021, notified by the Finance Ministry.

Ceding control

“The significant change introduced is the deletion of the requirements pertaining to Indian ownership and control, irrespective of whether the insurer has majority foreign ownership or not,” said Shailaja Lall, partner at law firm Shardul Amarchand Mangaldas & Co. “Previously, Indian promoters or investors were required to nominate a majority of the Board. This deletion is being seen favourably by foreign investors proposing to hold stakes in insurance companies,” she added.

“However, the requirement to have a majority of the board and KMP comprised of Indian resident citizens will mean that foreign investors will have to continue to rely on Indian citizens who are resident in India to man key roles in the insurance company and its board. Therefore, while the FDI limit in insurance companies has been increased to 74%, the government has sought to provide adequate protection for insurance companies,” she added.

While the rules are a step forward for enabling fresh investments in the insurance sector, more changes are needed before transactions can begin, PwC said in a note. Further amendments are now expected in Foreign Exchange Management (Non-debt Instruments) Rules, 2019, and IRDAI guidelines on Indian ownership and control, the advisory firm added.

“The Rules are identical to the draft rules which were published by the central government and it appears that none of the suggestions made by various industry bodies have been accepted,” observed Ms. Lall, stressing that the Consolidated FDI Policy would also need to be amended to enable the increase in FDI from 49% to 74% under the automatic route, to become effective.

Onerous requirements have also been stipulated on the retention of net profits linked to the insurer’s solvency margin and dividend payment plans, where a foreign player’s stake is more than 49%. Such firms will have to retain 50% of their net profits in General Reserves, if they propose to pay dividends on equity shares in any financial year when the prescribed solvency margin is not met.

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Printable version | Sep 26, 2021 10:33:34 AM |

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