Indian Government Permits 49% Foreign Investment in the Insurance Sector

March 11, 2015

The following Gibson Dunn alert, which originally was distributed on March 9, has been updated to reflect recent developments announced by the Indian Government.

The Government of India had recently promulgated the Insurance Laws (Amendment) Ordinance, 2014, dated December 26, 2014 ("Ordinance"), which substantially amended the existing Insurance Act, 1938, including in relation to foreign investment in Indian insurance companies. The Indian Insurance Companies (Foreign Investment) Rules 2015, dated February 19, 2015 ("Rules") issued pursuant to the Ordinance further provided for the modalities of foreign investment in Indian insurance companies. Accordingly, pursuant to the Ordinance and the Rules, the foreign direct investment policy of the Government of India ("FDI Policy") has now been amended by Press Note 3, dated March 2, 2015 ("PN3"), to permit increased foreign investment in Indian insurance companies and to make the FDI Policy consistent with the Ordinance and the Rules.

Prior to the Ordinance, the Insurance Act, 1938 imposed an aggregate ceiling of 26% on foreign investment ownership in an Indian insurance company. 

Key Amendments

The following are the key amendments promulgated by the Ordinance, Rules and PN3, in relation to foreign investment ownership in Indian insurance companies:

1. Total foreign investment ownership through any means, including portfolio investment, in an Indian insurance company (which includes insurance brokers, insurance third party administrators, surveyors and loss assessors), directly or indirectly (through one or more holding companies) cannot exceed 49%.
2. Aggregate foreign investment ownership up to 26% is permitted under the automatic route (i.e., without the prior approval of the Government of India). Foreign investment beyond 26% and up to 49% requires the prior approval of the Foreign Investment Promotion Board of the Government of India. In addition, prior approval of the Insurance Regulatory and Development Authority will continue to be required in all circumstances where there is any change in shareholding of an Indian insurance company.
3. The ownership and control of an Indian insurance company must remain in the hands of resident Indians at all times. "Control" has been defined under the Ordinance to mean the right to appoint a majority of the directors on the board of the company or the power to control the management or policy decisions of a company by virtue of shareholding, management rights, shareholders agreements or voting rights agreements.

In order to remain legally binding and effective, the Ordinance must be approved by both houses of the Indian Parliament within six weeks of the assembly of the Indian Parliament (i.e., the first week of April 2015), failing which the Ordinance will lapse. Any action taken prior to the lapsing of the Ordinance will remain valid. We note that the Indian Government has recently introduced a bill (substantially similar to the Ordinance) in the Indian Parliament to replace the Ordinance. While this bill has been passed by the Lok Sabha — the lower house of the Indian Parliament, the bill is currently pending before the Rajya Sabha — the upper house of the Indian Parliament.