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.


India: Legislative Updates

Francisco A. Laguna

 This week, TransLegal begins a series on recent legislative changes in India. In the following posts, we will analyze some of the more significant ones for foreign investors.

 Capital Markets

 The Securities Exchange Board of India (“SEBI”) has revised insider trading regulations. The new rules, contained in the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, enter into force 16 May 2015. One major change introduced by the new rules is that people not in the brokerage sector cannot obtain from an insider, directly or indirectly, any unpublished, price-sensitive information related to a company listed, or proposed to be listed, on an exchange. Insiders are defined as people who have been associated for the prior 6 months with a company that is listed, or proposed to be listed, on an exchange, and who are is in possession of the company’s unpublished, price-sensitive information.

Citizenship Law

The Parliament issued the Citizenship (Amendment) Bill, 2015, which purports to grant the same rights and privileges to persons of Indian Origin as well as Indian citizens living abroad.

Coal Mines Bill

Parliament of India Photo credit: Wikimedia Commons

Parliament of India
Photo credit: Wikimedia Commons

The Lower House of Parliament, the Lok Sabha, approved the Coal Mines (Special Provisions) Bill, 2015. The law seeks to make the process of granting coal mine leases more transparent. The Upper House, the Rajya Sabha, has yet to pass the law. The leasing process has been criticized for lack of transparency and corruption.

Foreign Direct Investment – Generally

The Department of Industrial Policy and Promotion (“DIPP”) is proposing to raise the FDI threshold from 12,000 million rupees to 30,000 million rupees. The Government may increase the threshold at which Cabinet approval for foreign investments becomes necessary, making India a more attractive venue for FDI. The goal is to attract foreign investments, particularly in infrastructure and manufacturing sectors. Currently, investments exceeding the 12,000 million limit require the approval of the Cabinet Committee on Economic Affairs.

TransLegal has advised clients on foreign direct investment regulations in the food & beverage as well as the hospitality sectors.

Foreign Direct Investment – Housing Sector

The Government has relaxed the rules related to repatriating FDI in the housing sector. In December 2014, the Government implemented these new rules by decreasing the required built-up area and capital needs. In March 2015, the DIPP clarified that the existing three-year lock-in will no longer apply, and under normal circumstances, an investor can exit on an automatic basis upon completion of the project or after the construction of basic infrastructure, such as roads, water supply and drainage. The Foreign Investment Promotion Board (“FIPB”) can approve earlier exits on a case by case basis.

The minimum built-up area requirement for development projects has been reduced from 50,000 square meters to 20,000 square meters, and minimum capital investment by foreign companies has been decreased substantially from US$ 10 million to US$ 5 million. In addition, the government has introduced an exemption to the minimum floor area and the capital requirements when an investor / joint venture company commits at least 30 % of the total project cost to low-cost housing.

 Foreign Direct Investment – Insurance and Pension Sectors

 In March 2015, the Indian Parliament passed the Insurance Laws (Amendment) Bill, 2015. The bill raises the foreign direct investment (“FDI”) cap in insurance companies from 26% to 49%. This increased FDI cap directly increases the allowable FDI in the pension sector: the Pension Fund Regulatory and Development Authority Act ties FDI limits in the pension sector to those in the insurance sector. This increase presents important opportunities for foreign companies in both sectors.

National Stock Exchange of India Photo credit: Wikimedia Commons

National Stock Exchange of India
Photo credit: Wikimedia Commons

Import / Export Documentary Requirements 

In March 2015, the Directorate General of Foreign Trade (“DGFT”) issued a notification drastically reduced the mandatory documents required for importing and exporting goods to three (3) documents. For imports, the mandatory documents are: bill of lading / airway bill; commercial invoice / packing list; and bill of entry. For exports, the mandatory documents are: bill of lading / airway bill; commercial invoice / packing list; and shipping bill / bill of export.

Intellectual Property

India’s IP Office now allows electronic filing for new applications for design & geographical indications. Previously, e-filing was only available for trademarks and patent applications.

Labor Law

 The 2015 Union Budget proposes the following amendments to applicable labor laws. First, the government seeks to provide increased flexibility for employee contributions to the Employee Provident Fund (“EPF”). Employees would be allowed to choose to participate in the EPF or a New Pension Scheme (to be developed). The proposal also provides that employees with incomes below certain monthly thresholds would have the option not to contribute to the EPF, without affecting or reducing the employer’s mandated contribution. In addition, the amendments would allow employers to offer employees participation in the Employee State Insurance (“ESI”) or a different health insurance product duly approved by the Insurance Regulatory Development Authority (“IRDA”).

Money Laundering

Presidential Standard of India Photo credit: Wikimedia Commons

Presidential Standard of India
Photo credit: Wikimedia Commons

Amendments to existing laws have been proposed to prevent money laundering. Two independent laws have been submitted to address unaccounted-for monies held offshore and dubious domestic transactions. Persons found to violate the law will be subject to prosecution and steep penalties. To implement these measures, amendments have been proposed to the Prevention of Money Laundering Act (“PMLA”), 2002 and the Foreign Exchange Management Act (“FEMA”). Under the proposed amendments, concealment of income and assets and evasion of tax related to foreign assets will be subject to prison sentences of up to 10 years. Each transaction in violation of the law will be treated separately, and offenders will not be allowed to reach an out-of-court resolution through the Settlement Commission. Those found guilty of tax evasion will be subject to penalties of 300% the tax that would have been paid on the concealed income and assets.

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