Insurance biz: MNCs can own 74%, but FIIs, PEs hold the key

(This story originally appeared in on Jul 12, 2021)

Mumbai: The government last week notified amendments to regulations for the insurance sector that enabled an increase in foreign investments — up to 74% from 49% earlier. The revised norms dilute the earlier restrictions that discouraged foreign investors when the foreign limit was hiked to 49% from 26% in 2015.

“Foreign investors can rejoice that ‘Indian Owned and Controlled’, which was introduced in 2015, has now gone. It will give confidence to foreign investors. Indian insurance sector needs capital and expertise and, with enhanced ownership and control, foreign insurers will be encouraged for a deeper commitment to Indian ventures,” said Consortia Legal senior partner Satyendra Shrivastava.

The government had amended the Insurance Act, 1938 in February, which was followed by notification of enabling rules by the finance ministry in May and amendment of the FDI policy in June. “With notification of regulations by sector regulator Irdai, the necessary amendments in the regulatory framework have now come into effect. Insurers can now formally apply to Irdai for an increase in foreign investment up to 74%,” said Shrivastava. The new norms only state that majority of the directors and key management persons should be Indians. Also, either the chairperson, managing director or chief executive officer should be a resident Indian.

However, insurers say that the game has now changed, and the deep-pocketed investors are not multinational companies but foreign institutional investors (FIIs) and private equity (PE) investors who face separate hurdles.

Ashvin Parekh, a consultant who has been advising the insurance industry for two decades, said that it made sense for companies to have local management as the Indian market is different from the West when it comes to investment products, actuarial tables or even reinsurance. Also, the contribution of foreign MNCs is not the same as earlier.

Parekh points out that 70% of business is concentrated with the top five non-life companies and top seven life companies. Additionally, in most of these, the Indian partner is driving the business with the foreign partner pulling back. The restrictions on transfer pricing and management compensation also limit the contribution that a foreign partner can make.

After the foreign investment limit was hiked to 49% in 2015, what became clear was that the money would come in from FIIs and PE funds — the new deep-pocketed investors.

“One pre-requisite for FIIs is listing of the companies that they invest in (only the insurance arms of SBI,

& HDFC have listed till date). At the time of liberalisation, the objective was to have a mandatory listing in 10 years. This was later interpreted as an indicative timeline. PE investors face separate hurdles — they are classified as promoters if they hold more than 10% and this is a disincentive as they do not want to take on the responsibility of committing to keeping the business solvent. If an enabling environment is created, the insurance industry can easily attract anywhere in the range of Rs 2-2.5 lakh crore by way of foreign investment,” said Parekh.