Intermediaries, TPAs will also benefit, but investments will be under 26% FDI cap
Foreign institutional investors (FII) and non-resident Indians (NRIs) can now invest in the insurance sector, within the overall 26 per cent cap on foreign direct investment (FDI).
Currently up to 26 per cent FDI is permitted in the sector. In a press note, the department of industrial policy and promotion (DIPP) said apart from insurance companies, the relaxation would apply to insurance brokers, third-party administrators (TPAs), surveyors and loss assessors.
All of this investment can be made under the automatic route. The Insurance Act, 1938 does not stipulate any FDI limits for insurance intermediaries or TPAs, but sector regulator Irda has restricted it to 26 per cent.
The Arvind Mayaram committee on definition of FII and FDI, in its draft report, had also suggested composite caps whereby FDI, FII and NRI investments would form part of the total cap on foreign investments.
A senior executive from a private life insurance company said that having FIIs and NRIs within the 26 per cent FDI cap would enable companies that do not have a foreign partner to attract investments through the route.
However, he added at the time of an initial public offer (IPO) by an insurance company, some stake may have to be diluted by foreign partners.
The department said the foreign investment would be subject to the condition that companies bringing in FDI would obtain the necessary licence from the Insurance Regulatory and Development Authority (Irda) for undertaking insurance activities. With respect to bank-promoted insurance companies, the department has said that private sector banking FDI norms would be applicable.
Banking sector FDI norms allow 74 per cent FDI, including investment by FIIs, in private sector banks. Here, the automatic route is followed up to 49 per cent and the government route beyond 49 per cent and up to 74 per cent.
The Insurance Act, 1938 says that an Indian insurance company is one in which the aggregate holdings of equity shares by a foreign company, either by itself or through subsidiary companies or nominees, do not exceed 26 per cent paid-up equity capital of such Indian insurance company.
In January, the Irda had set up a 10-member committee to look into 100 per cent FDI in insurance intermediaries and TPAs following requests from various stakeholders. The committee will submit its report in three months.
The Insurance Bill that seeks to increase FDI from 26 per cent to 49 per cent awaits Parliament approval. The Bill introduced in 2008 faced huge opposition in Parliament. There were various routes proposed, including models like 23 per cent through the FII route and 26 per cent through FDI.