Foreign Direct Investment (FDI) – Role in Insurance Business in India

 

In this article you will have a comprehensive note on Role of Foreign Direct Investment (FDI) in insurance business in India.

1. INTRODUCTION:

 

India is the most attractive foreign direct Investment destination in the world. Due to the growing demand for insurance, more and more insurance companies are now emerging in the Indian insurance sector. In fact FDI provides a win to win situation for the host country and the home country. Both countries are directly interested in inviting FDI, because they benefit a lot from such type of investment. Owing to the steady and fast growing Indian economy, India has become one of the most famous destinations for foreign direct investment. The rapid growth is all the business sectors in India is reciprocated by liberal trade policies, development in telecommunication and technology, expansion of markets and low restrictions from FDI. India now becomes the second most wanted FDI destination in the world. Indian insurance sector, especially general insurance sector is totally dominated by the government owned insurance company. With the increased percentage of FDI, various private insurance companies are likely to benefit the most.

 

As per the current FDI norms, foreign participation in an Indian insurance company is restricted to 26.0% of its equity / ordinary share capital. The Insurance Regulator has stipulated that foreign investment in Indian Insurance companies be limited to 26% of total equity issued (FDI limit) with the balance being funded by Indian promoter entities. The limit to foreign investment includes both direct and indirect investment and has been a cause of significant lobbying by foreign insurance companies for a change in regulations to increase the FDI limit to 49% of equity issued. For political parties such as Trinamool Congress who think that insurance is evil and equate it to all the ills that abounds the health-care of the west, it helps to remember that insurance in India has a deep-rooted history. Insurance in various forms has been mentioned in the writings of Manu (Manusmrithi), Yagnavalkya (Dharmashastra) and Kautilya (Arthashastra). The essential context of the historical reference to insurance in these ancient Indian texts is the same i.e. pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine.

 

FDI in insurance sector currently stands at around Rs2500 crore and we can expect it to approximately double now that the FDI cap is slated to rise by another 23 percent to 49 percent. Larger FDI would bring in better insurance education, superior product innovation and greater awareness efforts by insurance companies. For a country like India, an oligopolistic insurance sector with a large participation by domestic companies isn’t necessarily a good idea. There is phenomenal potential in the insurance sector and unfortunately because of the nature of the business, large capital investments are required and will be needed in future too to build scale in a large country like ours. The insurance sector for long has suffered from muted growth and needs a major breather in the form of higher FDI. The hike in FDI cap would spell good news for the common man as this would eventually lead to a decrease in insurance premium because of enhanced efficiency and innovation in the sector

The insurance sector is of considerable importance to every developing economy; it inculcates the savings habit, which in turn generates long-term investible funds for infrastructure building There is hardly a facet of the Indian psyche that the concept of ‘foreign’ has not permeated. This term, connoting modernization, international brands and acquisitions by MNCs in popular imagination, has acquired renewed significance after the reforms initiated by the Indian Government in 1991 (Mishra & Bhatnagar, 2009). As per guidelines issues by the Government of India the insurance sector also opened for foreign investors. And Indian insurance companies can issue equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares subject to pricing guidelines/valuation norms prescribed under FEMA Regulations for foreign direct investment in Indian insurance companies (FDI Circular, 2012). According to this policy Applications for foreign direct investment in insurance sector addressed to the Insurance Regulatory and Development Authority (IRDA) in order to ensure that the 26 per cent limit of foreign shareholding applicable for the insurance sector.

 

2. CONCEPT OF FOREIGN DIRECT INVESTMENT (FDI) IN INDIAN INSURANCE BUSINESS POLICY:

 

Foreign Direct Investment is the process whereby a resident of one country acquires the ownership of assets for the purpose of controlling production, distribution other activities of a firm in another country.

A foreign direct investment (F.D.I) is an investment made by a company in one country, into a company in another country. It refers to an investment made to acquire lasting or long-term interest in company or entity based operating outside of the economy of the investor. The investment is direct because the investor, which could be a foreign person, company or group of entities, is seeking to control, manage, or have significant influence over the foreign enterprise. FDI is a major source of external finance which means that countries with limited amounts of capital can receive finance beyond national borders from wealthier countries.

 

Foreign Direct Investment can be divided into two;

 

a.     Greenfield Foreign Direct Investment.

b.     Brownfield Foreign Investment.

 Foreign Direct Investment Foreign Direct investment is the direct investment to production in a country by a company in another country or by expanding operations of an existing business in that country. The investing company may make its overseas investment in a number of ways- either by setting up a subsidiary or associate company in the foreign country, by acquiring shares of an overseas company, or through a merger or joint venture. It is a controlling ownership in a business enterprise in one country by an entity based in another country FDI is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. The largest flows of foreign investment occur between industrialized countries, but flow of non-industrialized countries is increasing sharply.

As per the provision of Rule-2(f) of Indian Insurance Companies (Foreign Investment) Rules, 2015, “Foreign Direct Investment” (FDI) means and includes investment by non-resident or

persons resident outside India and other eligible entities in the equity shares of an Indian Insurance Company under clause(i) of sub-regulation (1) of Regulation-5 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (hereinafter referred to as FEMA Regulations, 2000:

 

Provided that for the purpose of these rules, Foreign Direct Investment shall include investment by Foreign Venture Capital Investors (FVCI) is permissible, under Regulation 6 of FEMA Regulations, 2000.

 

3. ORIGIN OF FDI IN INDIA:

 

The origin of FDI in India can traced back to 1500 A.D. the Portuguese Set up their unit in by the British East India Company in 1600 A.D. and Dutch East India Company in 1602 A.D. They came to our country as merchants and later turned industrialists and some of them became rulers. Fierce competition followed between these merchants and industrialists from these countries till 1800 A.D. Finally, British East India Company emerged successful and colonized India. Political subordination of was the protection for the British and MNCs’ markets from Japanese competition.

 

The entry of FDI into India on a commercial scale began in 1875 with initial investments in the field mining, tea plantation, railways, insurance, generation and distribution of electricity and wholesale and retail trade.

 

4. EVOLUTION OF FOREIGN DIRECT INVESTMENT (FDI) POLICY IN INDIA:

 

4.1. Foreign Direct Investment after Independence:

 

Up to August 1947, the policy of Government of India was one of permitting unconditional and unrestricted inflow of foreign capital due to political dependency. After Independence the Government of India's policy with regard to foreign capital was formulated, for the first time, in the Industrial Policy Resolution of 6 April 1948. The Government recognized the participation of foreign capital and enterprise, particularly as regards to industrial technique and knowledge for rapid industrialization of the economy.

 

4.2. DIFFERENT PHASES OF DEVELOPMENT OF FOREIGN DIRECT INVESTMENT AFTER INDEPENDENCE:

 

A.PHASE ONE ; PHASE OF CAUTIOUS WELCOME (1948-1968):

 

During this period the Regulations for Industrial Policy, 1948 has been brought into existence. During this phase the foreign capital was allowed to promote rapid industrialization, careful regulations of the conditions of foreign capital inflow to protect national interests, and majority interests in the ownership and effective control should always been in Indian hands.

 

B.PHASE TWO; PHASE OF SELECTIVE OPENING UP (1969-1991):

 

The period brought two regulations such as Monopolies and Restrictive Trade Practices (MRTP) Act, 1969 and FOREIGN EXCHANGE REGULATION ACT (FERA), 1973. The MRTP ACT brought in restrictions on the size of operations, pricing of products and services of foreign companies. FERA limited the extent of foreign equity to 40%, with the exception of 74% for technology-intensive, export-intensive and core sector industries.

 

C.PHASE THREE; PHASE OF LIBERALIZATION (1991-2000):

 

The Regulations of Industrial Policy 1991 and Foreign Exchange Management Act (FEMA) 1999 came into existence in this phase. In 1991 FDI up to 51% was allowed in the Automatic Route in 35 high priority industries requiring large investments and advanced technology.

 

In 1996 the automatic approval route for FDI was expanded, from 35 to 111 industries, under four distinct categories such as Part-A up to 50%, Part-B up to 51%, Part-C up to 74% and Part- D up to 100%.

Foreign Investment Promotion Board (FIPB) was continued for processing FDI proposals.

 

D.PHASE FOUR; GLOBALIZATION PHASE (2000-2014):

 

This phase has not brought any codified law and regulations rather the phase concentrate on the consolidated documentation. In 2000 except for a small negative list, all activities were placed under automatic route. Insurance and defence sectors were opened with a cap of 26%.

 

Telecom cap were increased from 49% to 74% in 2005. FDI up to 51% in single brand retail was allowed in 2006. Consolidation of existing FDI regulations to a single document for case of reference.

 

E. PHASE FIVE; RADICAL LIBERALIZATION (2014- Till Date):

 

This phase brought the Make in India Consolidated FDI Policy 2016. This policy regulation provided certain rules in the field of FDI, such as, FDI in pharma sector up to 74% in automatic route and beyond that in the government route.

 

In defense, foreign investment beyond 49% has been permitted through the government approval route, and 100% FDI in existing airport projects has been allowed in automatic route.

 

5. AN OVERVIEW OF INSURANCE SECTOR IN INDIA:

 

Insurance in India is listed in the Constitution of India in the Seventh Schedule as a Union List subject, meaning it can only be legislated by the Central government. The history of insurance date backs to 1818, when Oriental Life Insurance Company was started. In 1870, Bombay Mutual Life Assurance Society became the first Indian insurer. In the year 1912, the Life Insurance Companies Act and the Provident Fund Act was passed to regulate the insurance business. This was the first statutory measure to regulate life insurance business. In 1928, the Indian collect statistical information about both life and non-life business transacted in India by Indian and foreign insurers including provident insurance societies. In 1938, with a view to protecting the interest of the Insurance public, the earlier legislation was consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for effective control over the activities of insurers. The Government of India issued an Ordinance on 19 January 1956 nationalizing the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The Life Insurance Corporation (LIC) absorbed 154 Indian, 16 non-Indian insurers as

also 75 provident societies—245 Indian and foreign insurers in all. In 1972 the parliament passed General Insurance Business (Nationalization) Act, and consequently, General Insurance business was nationalized with effect from 1 January 1973 [6]. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on 1 January 1973.

 

In 1993, the Government set up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms in the insurance sector. Following the recommendations of the Malhotra Committee report, in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market.

 

The IRDA opened up the market in August 2000 with the invitation for application for registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the power to frame regulations under Section 114A of the Insurance Act, 1938 and has from 2000 onwards framed various regulations ranging from registration of companies for carrying on insurance business to protection of policyholders’ interests.

 

The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector. Before that, the industry consisted of only two state insurers: Life Insurers (Life Insurance Corporation

 

6. FDI POLICY FRAMEWORK IN INDIA :

 

A foreign direct investment (FDI) is a controlling ownership in a business enterprise in one country by an entity based in another country. Apart from being a critical driver of economic growth, foreign direct investment (FDI) is a major source of non-debt financial resource for the economic development of India. Foreign companies invest in India to take advantage of cheaper wages, special investment privileges like tax exemptions, etc. For a country where foreign investments are being made, it also means achieving technical know-how and generation of employment.Policy regime is one of the key factors driving investment flows to a country. Apart from underlying macro fundamentals, ability of a nation to attract foreign investment essentially depends upon its policy regime - whether it promotes or restrains the foreign investment flows. There has been a sea change in India’s approach to foreign investment from the early 1990s when it began structural economic reforms encompassing almost all the sectors of the economy.

 

6.1. Pre-Liberalisation Period:

 

Historically, India had followed an extremely cautious and selective approach while formulating FDI policy in view of the dominance of „import-substitution strategy‟ of industrialization. With the objective of becoming „self reliant‟, there was a dual nature of policy intention – FDI through foreign collaboration was welcomed in the areas of high technology and high priorities to build national capability and discouraged in low technology areas to protect and nurture domestic industries. The regulatory framework was consolidated through the enactment of Foreign Exchange Regulation Act (FERA), 1973 wherein foreign equity holding in a joint venture was allowed only up to 40 per cent. Subsequently, various exemptions were extended to foreign companies engaged in export oriented businesses and high technology and high priority areas including allowing equity holdings of over 40 per cent.

 

6.2. Post-Liberalisation Period:

 

A major shift occurred when India embarked upon economic liberalization and reforms program in 1991 aiming to raise its growth potential and integrating with the world economy. Industrial policy reforms gradually removed restrictions on investment projects and business expansion on the one hand and allowed increased access to foreign technology and funding on the other. A series of measures that were directed towards liberalizing foreign investment included:

 

(i) introduction of dual route of approval of FDI – RBI‟s automatic route and Government’s approval (SIA/FIPB) route, (ii) automatic permission for technology agreements in high priority industries and removal of restriction of FDI in low technology areas as well as liberalisation of technology imports,

(iii) permission to Non-resident Indians (NRIs) and Overseas Corporate Bodies (OCBs) to invest up to 100 per cent in high priorities sectors,

(iv) hike in the foreign equity participation limits to 51 per cent for existing companies and liberalization of the use of foreign „brands name‟ and

(v) signing the Convention of Multilateral Investment Guarantee Agency (MIGA) for protection of foreign investments.

These efforts were boosted by the enactment of Foreign Exchange Management Act (FEMA), 1999 [that replaced the Foreign Exchange Regulation Act (FERA), 1973] which was less stringent. This along with the sequential financial sector reforms paved way for greater capital account liberalization in India.

 

7. GUIDELINES FOR FDI IN INDIAN INSURANCE COMPANY:

 

The Insurance Laws (Amendment) Act 2015 introduced some much awaited reforms, including, increasing the foreign investment cap in the insurance sector to 49 percent, permitting overseas reinsurers to open branch offices to carry out reinsurance business in India, etc. The Insurance Laws (Amendment) Act, 2015 also provides for “Indian Owned and controlled” requirement for an Indian Insurance Company. The Insurance Laws (Amendment) Act, 2015 defines Indian insurance company under Section 2(7A) as under:

 

“Indian insurance company” means any insurer, being a company which is limited by shares, and, ( a) Which is formed and registered under the companies Act, 2013 as a public company or is converted into such a company within one year of the commencement of Insurance Laws (Amendment) Act, 2015; (b) In which the aggregate holdings of equity shares by foreign investors, including portfolio investors, do not exceed forty nine per cent of the paid up equity capital of such Indian insurance company, which is Indian owned and controlled, in such manner as may be prescribed. Explanation – For the purpose of this sub clause, the expression

“control” shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreement or voting agreements (c) Whose sole purpose is to carry on life insurance business or general insurance business or reinsurance business or health insurance business. In exercise of the powers conferred by clause (aaa) of subsection (2) of section 114 of the Insurance Act, 1938 read with clause (b) of subsection (7A) of section 2 of the Insurance Act, 1938 and section 24 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999), the Central Government has notified the Indian Insurance Companies (Foreign Investment) Rules, 2015. These Rules mainly govern Indian control of Indian Insurance Company, Indian ownership and issues relating to foreign investment. The definition of “Indian ownership” has since been amended by Indian Insurance Companies (Foreign Investment) Amendment Rules, 2015.

 

As per the above definition, control can be exercised by the virtue of

 

(a)Share holding or

(b)Management rights or

(c)Shareholders agreements or

(d)Voting agreement or

(e) Any other manner as per applicable laws.

 

7.1. GUIDELINES OF R.B.I. FOR FOREIGN DIRECT INVESTMENT:

 

An Indian company may receive Foreign Direct Investment under the two routes as given under:

 

i.  Automatic Route:

 

FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.

 

ii.  Government Route:

 

FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Application can be made in Form FCIL. Plain paper applications carrying all relevant details are also accepted. No fee is payable.

An Indian company issuing shares /convertible debentures under FDI Scheme to a person resident outside India shall receive the amount of consideration required to be paid for such shares /convertible debentures by:

 

(i)             Inward remittance through normal banking channels.

(ii)   Debit to NRE / FCNR account of a person concerned maintained with an AD category I bank.

(iii)         Conversion of royalty / lump sum / technical know how fee due for payment or conversion of ECB, shall be treated as consideration for issue of shares.

(iv)        Conversion of import payables / pre incorporation expenses / share swap can be treated as consideration for issue of shares with the approval of FIPB.

(v)   Debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category – I bank and is maintained with the AD Category I bank on behalf of residents and non-residents towards payment of share purchase consideration.

 

If the shares or convertible debentures are not issued within 180 days from the date of receipt of the inward remittance or date of debit to NRE / FCNR (B) / Escrow account, the amount shall be refunded. Further, Reserve Bank may on an application made to it and for sufficient reasons permit an Indian Company to refund / allot shares for the amount of consideration received towards issue of security if such amount is outstanding beyond the period of 180 days from the date of receipt.

 

8.  PROHIBITION OF FDI IN INDIA:

 

Though FDI is considered as the best Option for long term development, our Government has not allowed FDI haphazardly in each and every Sector. Government has not allowed FDI in those sectors which are not desired for the rational growth of the society and which may invoke to undertake illegal activities, in sectors which are not in the national interest. FDI restrictions have also been imposed in order to allow the domestic companies to make more profits with less competition, than that of in the presence of rivalry international firms.

 

Thus, it is clear from the government policies that FDI is not allowed in activities like gambling, casinos, business of chit hinds, Nidhi Company. At the same time, atomic energy sector is also not welcomed for FDI in order to protect the security and sovereignty of our country. In case of defense sector, Govemment has allowed 26 per cent FDI, in order to initiate investment process, but the stake and permission is restricted and depends on state of art so far. It is also well understood that agriculture is the backbone of our economy so to protect the livelihood of our half of the citizens who depend on agriculture; government has not allowed FDI in actual farming and cultivation process. But to boost the agricultural exports, FDI in agro processing industries is allowed. Therefore regulatory authorities such as RBI, DIPP, and SIA have allowed FDI, taken into account the various repercussions on our economy as a whole. The various Indian Sectors having restrictions of FDI are given below:

 

Foreign investment in any form is prohibited in a or a partnership firm or a proprietary concern or any entity, whether incorporated or not (such as trusts) which is engaged or proposes to engage in the following activities:

 

a.       Business of Chit fund, or

b.      Nidhi company

c.       Agriculture or plantation activities, or

d.      Real estate business. or construction of farm houses, or

e.       Atomic energy

f.       Lottery business including government/private lottery, online lotteries etc.

g.      Gambling and betting including casinos

h.      Activities and sectors not opened to private sector investments

i. Agriculture (excluding floriculture. Horticulture, development of seeds, animal husbandry, pisciculture and cultivation of vegetables, mushrooms etc. under controlled conditions and services related to agro and allied sectors) and plantation (other than tea plantation).

9. ROLE OF FDI IN INSURANCE BUSINESS IN INDIA:

 

Even after the liberalization of the insurance sector, the public sector insurance companies have continued to dominate the insurance market, enjoying over 90% of the market share. FDI in insurance would increase the penetration of insurance in India. FDI can meet India’s long term capital requirements to found the building of infrastructure. Insurance sector has the capability of raising long term capital from the masses.. An increase in FDI in insurance would indirectly help the Indian economy. The role of FDI in the present world is noteworthy. It acts as the life blood in the growth of the developing countries. The wave of liberalization, privatization and liberalization sweeping across the world has opened many national markets for international players. IRDA is in favour of an increase in foreign investment. India as the most promising, emerging insurance market in the world. The public sector insurance companies have continued to dominate in the insurance market.

 

Beside this the FDI plays the following important role in the Insurance Business in India:

 

i.  FDI increases investment level and their by income and employment.

ii.          FDI increases tax income of the government.

iii.        It facilitates transfer of technology.

iv. FDI encourage managerial revolution through professional management.

v.          It increase exports and reduce import requirements.

vi.        FDI increase competition and breakdown domestic monopolies.

vii.       It improves quality and reduces cost of inputs.

viii. Increase in wide and innovative insurance products and services in India.

ix.        Better competitive market.

x.     Better exposure of technology and other services from foreign partner.

xi.        Increase in insurance penetration and density.

xii.      Increase in employment opportunities.

 

The measure of insurance penetration and density reflects the level of development of insurance sector in a country. While insurance penetration is measured as the percentage of insurance premium to GDP, insurance density is calculated as the ratio of premium to population (per capita premium).

 

10. DRAWBACKS OF FDI IN INSURANCE BUSINESS:

 

In spite of the various benefits of the FDI in Indian Insurance Business the FDI also has many drawbacks in Indian Insurance Sector, such as the following:

1.  Profitability: Attract when return on investment is higher.
2. Cost of production: Encouraged by lower costs of production like raw material, labour etc.
3. Economic conditions: Market potential, infrastructure, size of population, income level etc.
4. Government policies: Policies like foreign investment, foreign collaboration, remittances, profits, taxation, foreign exchange control, tariffs etc.
5. Political factors: Political stability, nature of important political parties and relation with other countries.
6. Possibility of rise in unethical practices due to less control of government of India over Insurance sector.
7. Higher mobilization of Indian Saving amount to foreign countries.
8. Threat to public sector companies’ market share due to increasing number of private life insurance players.
9. Products and services offered may not fulfill Indian customer’s expectations.

 

11. QUANTAM OF FOREIGN DIRECT INVESTMENT UNDER INDIAN INSURANCE COMPANIES ( FOREIGN INVESTMENT) RULES 2015:

 

In exercise of the powers conferred by clause (aaa) of sub-section(2) of section 114 of the Insurance Act 1938 read with clause (b) of Insurance Regulatory and Development Authority Act, 1999, the central government hereby makes the following rules in respect of quantum of Foreign Direct Investment(FDI) under the Rules 3 to 10 of Indian Insurance Companies(Foreign Investment) Rules 2015:

I.                No Indian insurance company shall allow the aggregate holdings by way of total foreign investment in its equity shares by Foreign Investors, including portfolio investors, to exceed 49% of the paid up equity capital of such Indian insurance company.

II.              An Indian insurance company shall ensure that its ownership and control shall remain at all times in the hands of resident Indian entities referred to in clauses (k) and (l) of Rule 2.

III.             The Foreign Direct Investment proposals up to 26% of the total paid up equity of the Indian insurance company shall be allowed on the automatic route.

IV.            Foreign Direct Investment proposals which take the total Foreign Investment in the Indian Insurance Company up 26% and up to the cap of 49% shall be on the FIPB route, and shall require FIPB approval subject to compliance of the provisions of the Act.

V.              Foreign Portfolio Investment in an Indian Insurance Company shall be governed by the provisions contained in sub-regulations (2), (2-A),(3) and (8) of Regulations 5 of FEMA Regulations, 2000 and provisions of the Securities Exchange Board of India (Foreign Portfolio Investors) Regulations.

VI.            Any increase of foreign investment of an Indian Insurance Company shall be in accordance with the pricing guidelines specified by Reserve Bank of India under the FEMA.

VII.           The foreign equity investment cap of 49% shall apply on the same terms as above to Insurance Brokers, Third Party Administrators, Surveyors and Loss Assessors and other insurance intermediaries appointed under the provisions of the Insurance Regulatory and Development Authority Act 1999:

 

Provided that where an entity like a bank, whose primary business is outside the insurance area, is allowed by the Authority to function as an insurance intermediary, the foreign equity investment caps applicable in that sector shall continue to apply, subject to the condition that the revenues of such entities from their primary(i.e., non-insurance related) business must remain above 50% of their total revenue in any financial year.

VIII.         Other aspects related to or associated with or flowing from matters related to Foreign Investment in an Indian Insurance Company, which are not the subject matter of these rules, and fall within the regulatory ambit of the Authority, will be regulated as per regulations to be framed by the Authority, consistent with the relevant statutes and other rules framed thereunder.

 

12. INCREASE OF FDI BY INTRODUCING LATEST AMENDMENT:

 

Parliament on March 22 passed the Insurance Amendment Bill 2021 to increase the foreign direct investment (FDI) limit in the insurance sector to 74% from 49%. This measure was first announced by finance minister, Nirmala Sitharaman in the Union budget last month.

 

“Total Foreign Investment" in an Indian Insurance Company, shall mean the sum total of direct and indirect foreign investment by Foreign Investors in such company, calculated in such manner as is specified in regulations made by the authority with regard to registration of Indian Insurance Companies," according to Gazette.

 

It also mentioned that every Indian insurance company having foreign investment, existing on or before the date of commencement of the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2021, shall within one year from such commencement, comply with the requirements of the provisions.

 

Any Indian insurance company with foreign investment exceeding 49% should have half of its board of directors as independent directors “unless the chairperson of its board is an independent director, in which case at least one-third of its board shall comprise of independent directors."

 

The proposal to increase foreign investment is likely to help local private insurers grow fast and expand their presence across India, which has one of the lowest insurance penetration levels globally.

 

Insurance penetration in India is currently at 3.7% of the gross domestic product (GDP) compared to the world average of 6.31%. Growth in the life insurance sector has slowed to 11- 12% currently from 15-20% until fiscal 2020, as the pandemic pushed customers to save cash instead of spending on stocks or life insurance policies.

 

13. CONCLUSION:

 

At last we can say that there are good chances that increase in F.D.I. will improve the Insurance penetration and density. Along with that innovative insurance product and services, better use of technology, increase in employment and competition etc. are by-product of increase in F.D.I. in insurance Sector. Government of India through Insurance Regulatory and Development Authority of India. and Reserve Bank of India need to keep regular check on the outflow of India currency. The reforms have changed the whole scenario of Indian insurance industry. Its character has changed altogether in the wake of transition from a controlled to a competition- driven market. Several new players have entered into the insurance business. The foreign insurers have entered through the joint venture route. Their entry into the field has generated a tough competition in the market which resulted into better customer service. The quality and price of insurance products has greatly improved. The range of products and services has increased so as to give a wider choice to the customers. There is no doubt that the government monopoly over the insurance business had to end. There is crying need for better service, more innovation and a comprehensive insurance cover. The obvious changes in the insurance market are there for all to see in new brands, new products, fresh advertising and smart agents-all adding up to the excitement.