The FAQs have been prepared by Divya Tirkey, a 3rd year, BA LLB student at Rajiv Gandhi National University of Law, Patiala. She is currently interning with LatestLaws.com.
1.INTRODUCTION
Introduced as a part of the Finance Budget on 15th March in the Rajya Sabha, the Insurance Amendment Bill 2021 came into effect from April 1, 2021 after both the houses of Parliament passed it. The Bill was first passed by the Rajya Sabha on March 18 and then by the Lok Sabha on the 22nd of March 2021. Controversy ensued since the last time the FDI limit was hiked, the change took 7 years to be finally approved by the Parliament in 2015 while this time it was made a part of the finance budget, for the first time, to be approved within a month from its introduction.
- WHAT IS THE OBJECTIVE OF THE AMENDMENT OF 2021?
The Insurance Amendment Act 2021 aims to increase the influx of foreign capital into the Indian private insurers by increasing the FDI limit from 49% to 74% in insurance. The increased investment limit is hoped to incentivize competition and thereby growth. Local private insurers in India have one of the lowest insurance penetration levels globally and this amendment is expected to help such insurers accelerate in their expansion.
The Act aims at solving the severe liquidity pressures, capital constraints and solvency issues by increasing the FDI cap as was said by the finance minister, Nirmala Sitharaman, in her speech to Lok Sabha. The hope for it to work stems from the previous raise of the FDI cap in 2015, from 26% to 49%, which had resulted in over Rs.26,000 crores of FDI influx into the insurance sector in the five years since then. Also, assets showed an increase by 76% and around 28 companies in the insurance sector were able to gain access to FDI.
- WHAT CHANGES WERE MADE IN THE ACT OF 1938?
Three sections (S. 2, 27 and 114) have been amended by the 2021 amendment. The short title and commencement in Section 1 mention that the Act shall henceforth be called the Insurance (Amendment) Act, 2021 and will come into force on such date as notified by the Central Government in the Official Gazette.
The 1938 Act provided for the framework and regulated the insurance businesses operations and their relationship with the policyholders and IRDAI (Insurance Regulatory and Development Authority). The 2021 amendment has, essentially, aimed at the increasing FDI penetration in Indian companies thereby expecting to increase GDP which currently stands at a low of 3.76% against a global average of 7%.
- WHAT CHANGES HAVE BEEN MADE IN THE DEFINITION OF ‘INDIAN INSURNACE COMPANY’?
Section 2 (7A) defines “Indian insurance company” as “any insurer” which is a company and is limited by shares. It is incorporated under the Companies Act of 2013 (18 of 2013) in the nature of a public company or is transformed into the same within a duration of 1 year since the commencement of the Insurance Laws (Amendment) Act, 2015 (5 of 2015) [sub-clause (a)]. Sub-clause (b) of S.2 has now been changed to define an Indian insurance company as a company in which “the aggregate holdings of equity shares by foreign investors including portfolio investors, do not exceed seventy-four per cent. of the paid-up equity capital of such Indian insurance company, and the foreign investment in which shall be subject to such conditions and manner, as may be prescribed.” Previous ceiling of 49% has been changed to 74% and the words “Indian owned and controlled” have been replaced by “foreign investment”.
Therefore, while the ceiling has been increased, on the other hand, the restrictions on the ownership and control have also been removed. However, such foreign investment may be subject to additional changes that the Central Government may prescribe from time to time.
- WHAT HAS BEEN IN THE CHANGE OF PROVISION RELATED TO THE INVESTMENT OF ASSETS?
Section 27 contains provisions related to the investment of assets. Sub-section 7 of this section, which provides that the Indian assets invested by a foreign investor “shall be held in trust for the discharge of liabilities” and “shall be vested in trustees resident in India and approved by the Authority, and the instrument of trust under this sub-section shall be executed by the insurer with the approval of the Authority and shall define the manner in which alone the subject-matter of the trust shall be dealt with.” The explanation to this sub-section which clarified that this was applicable to an Indian-incorporated insurer, with one-third of its share capital owned by members domiciled out of India, stands removed.
What is implied by this change is that the insurers now need to hold a minimum level of investment in assets that could sufficiently clear their liabilities related to insurance claims. When an insurer has a domicile of a foreign country, his assets are mandatorily required to be held in a trust whose trustees are Indian residents. The explanation, which made this also applicable to those Indian-incorporated insurers whose either 33% capital are owned by people domiciled outside of India, or, 33% of governing body members are domiciled outside India, has now been deleted.
- WHAT HAS CHANGED WITH RESPECT TO S.114?
S.114 gives the power to Central Government to make rules for the purposes of this Act. Under sub-section 2 of this section the rules so made could earlier prescribe “the manner of ownership and control of Indian insurance company under sub-clause (b) of clause (7A) of section 2” [clause (aaa)]. The words “manner of ownership and control of Indian insurance company” have been changed to “the conditions and manner of foreign investment” by the 2021 amendment.
- WHY HAS THIS ACT INVITED MUCH DEBATE?
The Insurance Sector is a sensitive sector requiring heavy capital to function successfully, hence the frequent mergers of Indian companies with foreign insurance companies take place. It is also why the increase in foreign investment was felt needed, besides the crisis that came with the COVID-19 pandemic also being a major factor. Previously the involvement of foreign entities was restricted due to the issues of liabilities that came with long-term money investments made by the general public. Up until the year 2000, even private businesses were not allowed to operate in this sector. In 2000, for the first time, under the government of Atal Bihari Vajpayee, insurance sector had been opened up to allow private parties and FDI (up to 26%).
The core of the debate surrounding this Act has been political in nature, with the current opposition party (Congress) having opposed it in the Parliament when previously it had itself tried to change it when it constituted the government. BJP, who had previously opposed changes in the insurance sector, is the one who has now made the same changes.
- WHAT IS THE SIGNIFICANCE OF THE AMENDMENT?
There are currently more than 60 companies operating in the Indian insurance sector and only 6 are state-owned. The increase in FDI is hoped to fulfill huge capital requirements of this sector, the firms of which have to withstand a long gestation period (7 to 10 years) The firms of this sector are mandated by IRDAI to have a solvency ratio (assets : liabilities) greater than or equal to 150% .
Additionally, this luring of global firms is also expected to increase competition thereby improving the quality of goods and services provided. The change has been thus deemed to have favourable prospects for policy holders as well.
- WHAT ARE THE SAFEGUARDS IN PLACE?
Firstly, the key management cannot be held by non-residents of India. Non residents also cannot hold majority seats in the board of directors. Secondly, at least 50% of the directors must be independent. Third safeguard is the retention of a specific percentage of profit as general reserve. Lastly, an ‘Indian management control’ system has been put in place under which the Indian promoters in a joint venture in the insurance sector have been given the right to accept or reject any board decision taken on company related matters.
