India: Legislative Updates Reforms to the Insurance Sector

Francisco A. Laguna

 This week, TransLegal continues our series on recent legislative changes in India, focusing on the recent reforms to the insurance sectors and how they affect foreign investors.

 In March 2015, the Indian Parliament reformed the insurance sector by approving the Insurance Laws (Amendment) Bill, 2015 (“Insurance Amendment Act”), which amended the Insurance Act, 1938, the General Insurance Business (Nationalization) Act, 1972 and the Insurance Regulatory and Development Authority Act, 1999 (“IRDA Act”). Although published in late March, the Insurance Amendment Act entered into force as of 26 December 2014.

The Insurance Amendment Act increases permissible foreign direct investment (“FDI”) in Indian insurance companies – clearly a significant change. However, the Act implements other noteworthy changes, discussed below.

Increase in FDI Cap


Symbol for Rupee (INR) Photo Credit: Wikimedia Commons

Symbol for Rupee (INR)
Photo Credit: Wikimedia Commons

The Insurance Amendment Act nearly doubles allowable FDI in the insurance sector from 26 % to 49 %. The new cap became effective as of 26 December 2014. The cap is applicable to direct and indirect FDI and to foreign portfolio investments. Foreign portfolio investments include investments by foreign institutional investors, qualified financial investors, foreign portfolio investors and non-resident investors.

FDI up to 26 % in an Indian insurance company is permitted under the “automatic route”, i.e., no government approval is required. FDI exceeding 26 % and up to 49 % must be approved by the Foreign Investment Promotion Board.

The FDI cap also applies to “other insurance intermediaries”. The Insurance Amendment Act does not define the term; however, the IRDA Act provides that intermediaries include insurance brokers, reinsurance brokers, insurance consultants, surveyors and loss assessors.

If applicable, foreign investors, at any level, must obtain necessary licenses from the Insurance Regulatory Development Authority of India (“IRDA”) to conduct insurance activities.

It is expected that the increased FDI limits will result in investments of up to INR 60,000 crores (~ US$ 9.5 billion) over the next 5 years.

Insurance Companies must be Indian Owned and Controlled 

India Gate, Delhi Photo Credit: Wikimedia Commons

India Gate, Delhi
Photo Credit: Wikimedia Commons

Insurance companies that accept FDA at any level must be Indian owned and controlled. Control is determined by the right to appoint a majority of the company’s board of directors, or to control management or policy decisions, including application of rights derived from shareholder or management rights or shareholder or voting agreements.

This is an important change because the Insurance Act, prior to being amended, did not require Indian insurance companies to be owned and controlled by individuals resident in-country. As such, it was possible for offshore strategic partners in the insurance sector to have substantial control, including reserved matters or veto rights on operational and financial policy decisions of the joint venture. This provision of the Insurance Amendment Act may affect offshore partners that currently have substantial control.

Structuring Promoter Investments

Before being amended, the Insurance Act only allowed insurance companies to issue one class of equity stock, which greatly curtailed the sector’s ability to structure investments. The Insurance Amendment Act gives the IRDA the ability to designate other classes of shares that can be issued by insurance companies. The IRDA is expected to publish a list of permitted classes in the near future.

Health Insurance

The Insurance Amendment Act defines the “health insurance business” as a business which provides for sickness benefits or medical, surgical or hospital expense benefits, including coverage for in-patient and out-patient travel and personal injury / accidents. The Act recognizes the health insurance sector, for the first time, as a separate vertical business.

Promoting Reinsurance in India


Flag of India Photo Credit: Wikimedia Commons

Flag of India
Photo Credit: Wikimedia Commons

The Insurance Amendment Act defines reinsurance as the insuring of part of one insurer’s risk by another insurer who accepts the risk for a mutually acceptable premium. The minimum capital requirement for a reinsurance company has been fixed at INR 200 crores (~ US$ 61.3 million). The Insurance Amendment Act also permits foreign reinsurance companies to establish branches in India, provided the net worth of the foreign company is at least INR 5,000 crores (~ US$ 790 million).

Corporate Governance

 The Insurance Amendment Act appears to place a priority on the interests of individual policy holders. For instance, the period during which an insurance company can cancel a policy on any ground has been restricted to 3 years as of the issuance thereof. The Act also has enabling provisions that allow for the imposition of penalties on intermediaries and insurance companies for misconduct. Penalties range from INR 1 crore to INR 25 crores (~ US$ 160,000 – 4 million).

Call TransLegal with your questions concerning Indian laws and regulations and how they may impact your proposed FDI projects.