In a timely move intended to attract foreign direct investment (FDI), the government has allowed 100% FDI under the automatic route in insurance intermediaries. Industry stakeholders had long requested a relaxation in investment caps and the removal of the Indian owned and controlled requirement. The request was more strongly expressed in the case of insurance intermediaries, who serve as facilitators as opposed to being engaged in the business of insurance. Despite positive assurances in the government budget for 2019–2020, the relaxation in foreign investment norms came into effect only in April 2020.
The Department for Promotion of Industry and Internal Trade (DPIIT) issued its Press Note 1 of 2020 on 21 February 2020, which amended the consolidated FDI Policy of 2017 to permit 100% FDI in insurance intermediaries under the automatic route. The note also removed the Indian owned and controlled requirement. To give effect to Press Note 1, the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 (ND Rules) were amended on 27 April pursuant to the ND Rules second amendment of 2020.
Though the investment cap was relaxed and removed the Indian owned and controlled requirement, the liberalization is not as comprehensive as it was thought to be. All foreign investment is subject to supervision by the Insurance Regulatory and Development Authority of India (IRDAI), which requires an insurance intermediary with a foreign investor owning a majority shareholding to comply with the following conditions:
It should be incorporated as a limited company under the provisions of the Companies Act, 2013;
At least one of those holding the office of the chairman of the board of directors, the chief executive officer, principal officer or managing director of the insurance intermediary has to be a resident Indian citizen;
It must obtain prior permission from the IRDAI for the repatriation of dividends;
It must introduce the latest technological, managerial and other skills;
It must not make payments to the foreign group, promoter or subsidiary, or interconnected or associate entities beyond what is necessary or permitted by the IRDAI, and
The composition of the board and the identity of key management personnel of the insurance intermediary should be as specified by the IRDAI.
Some of these requirements are broad and unclear. The IRDAI (Insurance Intermediaries) (Amendment) Regulations, 2019 notified by the IRDAI on 30 October 2019 (IA Regulations) should be examined to obtain greater clarity. The IA Regulations prescribe that intermediaries with a majority foreign shareholding should make disclosures in the form of an undertaking to the IRDAI that they will abide by the above restrictions. The form of the disclosures require, among other things, that intermediaries ensure that the majority of the directors and the key managerial personnel are resident Indian citizens, and that they limit payments, apart from dividends, to related parties to not more than 10% of the total expenses incurred by intermediaries in a financial year. The restrictions imposed by the IRDAI are intended to regulate cash upstreaming and to ensure the residential status of the management of the intermediary.
While the liberalization of insurance intermediation is a welcome step, the robust checks and balances put in place by the IRDAI in terms of regulatory oversight may reduce the effect of the measures. The regulatory requirements by the IRDAI that ensure resident management and the imposition of restrictions on upstreaming of cash may not be well received by foreign investors. The same may be viewed as restrictions as opposed to easing of norms, which was supposed to be the objective and rationale behind the recent amendments. Liberalizing FDI in the insurance intermediaries’ sector, which is an under-penetrated market and yet to reach its complete investment potential, should have been absolute and not with strings attached.
Considering the impact of covid-19 on the economy and the urgent need for a fiscal stimulus to restart the economy, the efforts to liberalize FDI norms in respect of insurance intermediaries is timely and ambitious. However, they fall short of industry expectations as it is giving with one hand and taking away with the other.
Given that the IRDAI is expected to issue guidelines from time to time with respect to the composition of boards and the identity of key managerial personnel, it remains to be seen how the IRDAI will address issues of operational independence and regulatory certainty, so that potential investors view the industry favourably.
Vivek Pareek is a partner designate and Maathangi Hariharan is an associate at L&L Partners.
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