India Govt increase FDI in insurance industry to 74%

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The Indian government has an increase in the permitted foreign direct investment in insurance companies from the current 49 percent to 74 percent

In her Budget 2021-2022 speech, minister of finance Nirmala Sitharaman said: “I propose to amend the Insurance Act, 1938 to increase the permissible foreign direct investment limit from 49 percent  to 74 percent in insurance companies and allow foreign ownership and control, with safeguards.”

She added: “Under the new structure, the majority of directors on the board and key management persons would be resident Indians, with at least 50 percent of directors being independent directors, and specified percentage of profits being retained as general reserve.”

AM Best called the move an opportunity for significant inflow of capital into the country’s fast-developing insurance market. “The increase will allow Indian insurers greater financial flexibility in additional capital-raising, and over time is expected to support a bolstering of the industry’s solvency.

Aside from the government’s mandate for control of the companies to remain with resident Indian citizens, which may be a limiting factor for foreign insurers looking to hold majority interest, a specified percentage of profits is also to be retained as a general reserve, which will contribute to the strengthening of companies’ capital positions,” said the ratings agency.

It added: “Best is of the opinion that the Indian insurance industry is likely to attract significant overseas capital, which is crucial to strengthening the solvency of the overall industry, particularly for the general insurance companies, which recorded declining capital buffers over the last few years. The raised foreign direct investment cap should also enable insurers to expand underwriting operations further, which will contribute to growing insurance penetration in the country.”

The move was broadly welcomed by industry in India. Indian business paper Financial Express said the increase “will help insurance companies to raise funds to ensure their solvency is maintained in line with growing business needs”, adding: “This may also help increase M&A in the sector while paving the way for PE funds to enter the space.”

The paper quoted Manoj Purohit, partner and leader – financial services tax, BDO India as saying: “This will also augment foreign inflows and help attract more foreign companies.”

In another Indian business paper, Business Standard, Vighnesh Shahane, managing director and chief executive officer at Ageas Federal Life Insurance, said it was a move in the right direction. “Insurance is a capital-intensive business and [after] the pandemic many Indian partners are not in a position to invest further capital in their companies. Certain companies also require capital infusion to conserve solvency margins. The Covid-19 pandemic has shown that further penetration of insurance in India is needed and for that, capital infusion is required. The foreign direct investment hike will give the foreign promoter an opportunity to buy out its cash-strapped Indian partners if required and provide the needed cash infusion,” he said.

It also quoted Anuj Shah, a partner at Khaitan & Co: “This one reform will overhaul the insurance sector with a newly found tailwind of foreign capital and knowhow. The finance minister has also proposed that foreign ownership and control (which was not available until now) will be permitted with safeguards. While we wait to see the final notification, this is indeed a very welcome move for the insurance sector.”

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