India's Budget For 2020 | Insurance Update

Author:Mr Nikhil Narayanan and Rohit Ambast
Profession:Khaitan & Co
 
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The Union Budget 2020, announced on Friday, 5 July 2019, has proposed some significant changes for the insurance sector in India.

100% FDI for brokers and other insurance intermediaries

The existing foreign direct investment (FDI) cap of 49% applies to the entire insurance sector in India, including brokers, corporate agents, third-party administrators, web aggregators and other insurance intermediaries. The government has now announced that FDI of up to 100% will be permitted for insurance intermediaries. This change does not apply to the remainder of the insurance sector.

The Insurance Regulatory and Development Authority of India (IRDAI) historically had concerns in relation to the potential relaxation of the FDI limit for insurance intermediaries, but more recently, its position appears to have softened. The change announced in the Union Budget is a welcome move as the highly fragmented insurance distribution market in India could benefit from international investment.

In order to give full effect to the government's decision, the following changes will need to be made to the current regulatory regime:

an amendment to the FDI Policy clarifying that the FDI cap of 49% is no longer applicable to insurance intermediaries; an amendment to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2017 will also be required with regard to the changes to the FDI policy; an amendment to rule 9 of the Indian Insurance Companies (Foreign Investment) Rules 2015, to exempt insurance intermediaries from the 49% FDI cap; and an amendment to the guidelines on the meaning of 'Indian Owned and Controlled' dated 19 October 2015, together with a clarification to the 'Guidelines on Indian Owned and Controlled for Insurance Intermediaries' dated 20 November 2015. These developments will need to be monitored.

Comment

The proposal to increase the FDI limit for insurance intermediaries to 100% is a welcome shift in policy and should encourage M&A activity in the sector. Insurance penetration in India is still low and the domestic insurance intermediary market is heavily fragmented. However, before a formal notification for the new 100% FDI limit is issued, the IRDAI will be consulted and it may impose additional investment conditions. Therefore, the market awaits the detail of the changes.

Increasing the 49% FDI cap for insurers

The above change applies only to insurance intermediaries and for the...

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