Insurance Amendment Bill introduced in Rajya Sabha proposing hike on FDI

The Finance Minister, Smt. Nirmala Sitharaman introduced a bill to amend the Insurance Act, 1938 in Rajya Sabha on Monday. This bill proposes an amendment to raise the Foreign Direct Investment (FDI) limit in the insurance company up to 74%.

The Insurance Act, 1938, contains the provisions for India’s functioning and regulates the relationship between the insurers, shareholders, policyholders, and the regulator (Insurance Regulatory and Development Authority of India). The Finance Minister proposed a raise in the FDI limit in insurance to 74% in the Budget 2021. Accordingly, the Finance Minister introduced the Insurance (Amendment) Bill, 2021 in Rajya Sabha to implement the announcement made in the Budget 2021.

The current Insurance Act, 1938, allows foreign investors to hold up to 49% of the capital in the Indian insurance companies. Indian insurance companies are those insurance companies that are owned and controlled by an Indian entity. The Insurance (Amendment) Bill increases the limit from 49% to 74%. However, such foreign investment is subject to additional conditions prescribed by the central government.

The Insurance (Amendment) Bill also seeks to amend the definition of “Indian insurance company” stated in Section 2(7A) of the present Insurance Act. The current definition of “Indian insurance company” states that the aggregate holdings of equity shares by foreign investors, including portfolio investors, should not exceed 49% of the paid-up equity capital of such an Indian insurance company. 

The Insurance (Amendment) Bill amends the definition of “Indian insurance company”. The amended definition states that the aggregate holdings of equity shares by foreign investors, including portfolio investors, should not exceed 74% of the Indian insurance company’s paid-up equity capital. This new definition allows ownership and control to foreign investors with adequate safeguards in the insurance sector.

The proposed amendments will achieve the FDI policy’s objective of supplementing domestic long-term capital, skills, and technology for growth in the economy and the insurance sector. It will also enhance insurance penetration and social protection in India.

The amendment to hike the FDI limit will open up new funding avenues while some insurers struggle with solvency issues in the insurance sector. This move to increase the FDI in insurance and launching an Initial Public Offering (IPO) of the Life Insurance Corporation (LIC) will bring more efficiency to the market. 

Many insurance companies in India are formed by entering into joint ventures between domestic and foreign partners. The hike in the FDI limit in insurance will attract new foreign investors as it facilitates many joint ventures between domestic and foreign partners. It allows for an increase in the control and ownership of foreign partners in the Indian insurance companies. 

For any clarifications/feedback on the topic, please contact the writer at mayashree.acharya@cleartax.in

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