RBI, Irdai to vet FDI in bank-promoted insurers

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August 21, 2021 4:00 AM

“These rules may be called the Foreign Exchange Management (Non-debt Instruments) (Second Amendment) Rules, 2021,” it said.

The proposal to hike the FDI limit to 74% is expected to open up new avenues of funding at a time when some insurers are struggling with solvency issues, analysts have said.The proposal to hike the FDI limit to 74% is expected to open up new avenues of funding at a time when some insurers are struggling with solvency issues, analysts have said.

The Reserve Bank of India and insurance regulator Irdai will scrutinise applications for foreign direct investment (FDI) in an insurance firm promoted by a private bank to ensure that the 74% limit is not exceeded, the finance ministry has said in a gazette notification.

In March, the FDI cap in the insurance sector was hiked from 49% to 74% with an amendment to the Insurance Act, 1938, to help insurers struggling with liquidity pressure boost solvency. The latest notification is aimed at better enforcement of the rule change.

“Applications for foreign direct investment in private banks having joint venture or subsidiary in insurance sector may be addressed to the Reserve Bank for consideration in consultation with the Insurance Regulatory and Development Authority of India (Irdai)…,” the notification said.

“These rules may be called the Foreign Exchange Management (Non-debt Instruments) (Second Amendment) Rules, 2021,” it said.

About Rs 26,000-crore FDI had flowed into the growing insurance sector since 2015 after the limit was enhanced to 49% from 26%. As many as 22 of 56 direct insurance companies in the country have received around 40% in FDI. Average FDI in private insurance companies (excluding reinsurers) is about 31%.

It added that an Indian insurer having foreign investment would comply with the provisions under the Indian Insurance Companies (Foreign Investment) Rules, 2015, as amended from time to time and applicable rules and regulations notified by the department of financial services (of the finance ministry) or the Irdai from time to time.

The proposal to hike the FDI limit to 74% is expected to open up new avenues of funding at a time when some insurers are struggling with solvency issues, analysts have said.

Apart from drawing new foreign investors, the hike in FDI limit will also allow foreign partners, currently in joint ventures, to raise their stake and control the Indian insurance firms. Close to two dozen insurance companies in India are formed of joint ventures between domestic and foreign partners, including ICICI Prudential, HDFC Standard Life, Bajaj Allianz and Star Union Daiichi Life Insurance.

Allaying fears of lawmakers on possible abuse of the legislation, finance minister Nirmala Sitharaman had said in March that adequate safeguards were built into the law. Majority of directors on the board and key management persons would have to be resident Indians, with at least half of directors being independent ones, and specified percentage of profits being retained as general reserve.

The life insurance sector in India was liberalised in 2000 after the government had allowed foreign companies to own up to 26% in domestic insurers. The sector was opened up further in 2014 when the FDI limit was hiked to 49%.

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