Government notifies changes in FEMA to enable up to 74% FDI in insurance

NEW DELHI:  The government has amended the Foreign Exchange Management (non-debt instruments) Rules, 2019 to enable the increase in foreign direct investment limit in the insurance sector to 74%.

“Applications for foreign direct investment in private banks having joint venture or subsidiary in insurance sector may be addressed to the Reserve Bank for consideration in consultation with the Insurance Regulatory and Development Authority of India (IRDAI), in order to ensure that the limit of foreign investment applicable for the insurance sector as specified in serial number F. 8.1 and F. 8.2 is not breached,” the notification said.

Earlier in March, Parliament passed a bill to raise the foreign direct investment (FDI) limit in the insurance sector from 49% to 74%. The Insurance Act, 1938 was last amended in 2015, which raised the FDI limit to 49%, resulting in a foreign capital inflow of Rs 26,000 crore in the last five years.

In May, the finance ministry had notified the Indian Insurance Companies (foreign investment) Amendment Rules, 2021 that require insurers with foreign ownership of over 49% to maintain a solvency margin of 180%, if they declare dividend payments in a financial year.

The rules suggest that insurance companies with foreign ownership above 51% will have to set aside 50% of their net profit in a general reserve, if they cannot meet the 180% margin requirement.

Such insurance companies also need to have 50% of their directors as independent directors. Foreign-owned insurance companies are also mandated to have the majority of its directors and key management persons as resident Indians.

FDI cap raised from 49% 

In March, Parliament had passed a bill to raise the foreign direct investment limit in the insurance sector from 49% to 74%. The Insurance Act, 1938 was last amended in 2015, which raised the FDI limit to 49
%, resulting in a foreign capital inflow of Rs 26,000 crore in the last 5 years.