The foreign ownership cap for the sector is set to be raised to 74%, but prospective investors are waiting for details of yet-to-be announced ‘safeguards’ before they have a flutter. Freny Patel reports

The proposal to raise the foreign ownership cap in India’s insurance sector to 74% will open the floodgates for many international insurers, which until now were sitting on the fence, as with a 49% shareholding they would not have control. As such, 1 February was a great day for insurers, when Finance Minister Nirmala Sitharaman proposed relaxing foreign shareholdings from the existing 49% in her budget address.

Canadian insurers Manulife Financial Corporation and Intact Financial Corporation, Switzerland’s Chubb, South Africa’s Discovery, South Korea’s Samsung Life Insurance, and a host of other international players are believed to have expressed interest in the Indian market – when the foreign ownership caps are relaxed.

“A fair share of new companies are expected from the US, EU, Australia, and developed countries in Asia, which have run out of growth and have been eyeing India for some time, but wanted control,” says Joydeep Roy, a partner at PwC, heading the insurance practice. “New companies would mean new product offerings and new practices,” he adds.


This game changer, attracting new insurance players, would also strengthen solvency, boost competition and increase the penetration of insurance in the market. More insurance players would mean that more risk is shared among many.

The entry of the global giants with better technological and product development capabilities could increase sales penetration, improve customer experience and expand the insurance market. According to data from the 2019-20 annual report of Insurance Regulatory and Development Authority (IRDA), life insurance penetration is 3.6% of India’s gross domestic product (GDP), way below the global average of 7.1%. The statistics for general insurance are far worse, at 0.9% against the world average of 2.8%.

Driving force behind relaxing caps

Relaxing foreign ownership caps has been a long-awaited demand of global insurers, probably since the sector opened up to private players, back in December 1999, when foreign investment was capped at 26%. The government allowed foreign investors to acquire up to 49% 10 years later, still falling short of granting them control.

So, what was behind the recent announcement to relax the foreign ownership cap? The Minister of Commerce and Industry, Piyush Goyal, has said that the US had “requested” India to increase foreign ownership in the insurance sector. The idea behind the increase to 74% was with a view that fresh capital would be ploughed into the country, and not just “the sale of old capital to help foreigners increase their shareholding”, said Goyal.

Raising the foreign ownership stake to 74% was always on the cards – it just took a long time to get there, says a Delhi-based corporate lawyer. The government has been wanting to attract foreign capital and there was no reason why the foreign investment cap for the insurance sector should be at 49% when industries like banking and mutual funds are at 74% and 100%, respectfully.

Covid-19 acted as a catalyst. The decision to increase foreign investment in the insurance sector could not have been better timed for an industry flooded with claims arising from the global coronavirus pandemic, and badly in need of fresh funding.

“Many Indian partners are not in a position to invest further capital in their joint ventures, though some require capital infusion to conserve solvency margins,” says Vighnesh Shahane, managing director and CEO at Ageas Federal Life. “The relaxation in foreign ownership will allow overseas partners to buy out their cash-strapped Indian promoters if required and provide the needed cash infusion,” he says.

Aravind Venugopal, a partner in the corporate, M&A and private equity practice group at Khaitan & Co’s Bengaluru office, says the driving force for relaxing foreign ownership was a combination of factors. “In addition to the hike pending for a long time, and the industry being under stress, the central bank has reservations on banks investing in the insurance sector, which it perceives is non-core,” he explains.

The majority of domestic shareholders in the insurance sector are public sector banks. Concerned over liquidity issues, capital adequacy ratios and non-performing assets, banks have been reluctant to infuse additional capital. “The Reserve Bank of India [RBI] has urged banks to focus on their core business of banking,” says Shahane.

Last year, IDBI Bank pared down its shareholding from 48% to 25% in Ageas Federal Life Insurance Company, a three-way partnership with Belgium’s Ageas Insurance International and Federal Bank.

Similarly, last October, Axis Bank was forced to tweak its stake acquisition plans in Max Life Insurance after the RBI would not allow the private sector bank to directly acquire a 17% shareholding in the insurance company. Instead, it advised the stake purchase in the life insurer be made along with Axis Bank’s two subsidiaries – Axis Capital and Axis Securities.

Not all insurers are under financial stress. With no real need for fresh capital today – at least not as far as the health insurance sector is concerned – the relaxation in foreign ownership could result in an exchange between shareholders “with the colour of money changing”, says Roy at PwC.

Whatever the driver, the proposed relaxation in foreign ownership has created a lot of positive sentiment.

Safeguards or deterrents?

Still, “the safeguards yet to be announced may make or break the proposed reform”, warns Venugopal, adding that these are likely to be formulated by the Ministry of Finance and the Insurance Regulatory and Development Authority.


The finance ministry has said it would allow foreign ownership and control, but this would come with “safeguards”. The majority of insurers’ key management personnel and board members would need to be Indian residents, and at least 50% of the board should comprise independent directors. These new requirements would ensure sufficient local participation and requiring a percentage of the profit to be retained as general reserves would prevent excessive capital repatriation by foreign partners, notes one Delhi-based lawyer who wished to remain anonymous because he advises insurance clients.

“The key challenge here would be how fairly the government articulates the requirement of Indian residents running the management of insurance companies and the level of control that foreign shareholders will be allowed to have over the management,” says Ashwyn Misra, a Mumbai-based corporate partner at Trilegal. “It is important for the government to strike the right balance between the level of shareholding that an investor has with the extent of control/management participation that the investor should expect,” he adds.


Roy sees the requirement of having 50% independent directors on the board as “a great enabler for new companies coming in”. They may not know the market at the initial stage and this is global best practice, he says. “Independent directors can raise alarm bells if something is going wrong.”

There is an equal lack of clarity as to whether parties wanting to hold shares beyond 49% would require government approval, in addition to that of the insurance authority, Venugopal points out. He expects greater clarity on this front when the amendments to the Non-debt Instruments Rules are released.

Venugopal says other regulations issued by the insurance authority on corporate governance, registration and private equity investment may also affect international investment into the Indian insurance sector. He predicts the IRDA’s separate private equity guidelines may undergo amendments to implement foreign ownership and control by foreign private equity funds.

“Several private equity investors have shown great interest in the Indian insurance sector but have so far hesitated from committing greater capital, either due to the current 49% foreign ownership limit already exhausted by many insurers, or due to the financial health and capacity of the current Indian promoters,” he says.

Agreements pose challenges

The real legal challenge for many existing international partners lies in the contractual agreements signed with their Indian counterparts.

Many global players are interested in increasing their shareholding to 74%, but they will need to work within the contractual framework of their joint venture agreements. A lot of these agreements, signed when the sector opened up more than two decades ago, capped foreign shareholding at 49% or 50%, or best equal shareholding with the Indian partner if the company goes for public listing. According to an insurance analyst, about 65% to 70% of unlisted insurance companies have included in their contractual agreements the maximum shareholding their foreign partners can acquire.

“The co-operation of the local partner will be needed,” says Venugopal, as international insurers with existing joint ventures will likely review their current agreements and discuss the future shape of their joint venture arrangements. “This is likely to be influenced by whether existing arrangements contemplate mandatory/optional scaling-up on liberalization of foreign ownership caps, or whether existing arrangements are silent,” he says.

Misra says that the degree to which joint venture agreements provide for the Indian party to retain control or have equal shareholding, even if foreign ownership is allowed beyond 51%, will prevail to the extent consistent with applicable laws.

He is optimistic that the revised foreign ownership regime will create a platform for foreign shareholders to renegotiate agreements. “Indian shareholders will be more receptive to re-setting contractual rights if the insurance business requires fresh capital and/or where they need the liquidity,” he says.

Then there are special situations. The State Bank of India is mandated by a statutory requirement to maintain a 51% shareholding in the listed SBI Life Insurance Company. This means that even if the law relaxes foreign ownership up to 74%, the state-owned bank will have to retain a majority stake. It has been reported that French insurer BNP Paribas Cardiff, the initial joint venture partner in SBI Life, is evaluating the sale of its shareholding, which currently stands at 5%, down from an initial 26% stake in 2001.

Existing foreign insurance partners should be mindful that increasing their shareholding above 50% would make it a strategic investment, as opposed to the current treasury investment in Indian insurance companies. This, Roy explains, means they would be subjected to additional compliance requirements, which could include those of the US Securities and Exchange Commission, Europe’s General Data Protection Regulation (GDPR), international accounting laws such as US GAAP (generally accepted accounting principles), IFRS 17 (international financial reporting standards), and other corresponding requirements of their home jurisdictional regulators. This extra monthly/quarterly reporting would mean a lot of work, says Roy.

The liberalization of foreign ownership has been seen in some of the other Asian jurisdictions. Last year, China permitted 100% foreign ownership in its domestic life insurance companies. Thailand has removed restrictions on foreign share holdings in insurance companies, allowing them to hold 100%, as opposed to 49% in 2017. Indonesia has also taken a lenient stance, allowing foreign investors to inject additional funds, even if that would result in their ownership exceeding the 80% foreign investment cap.

More M&A activity

Quite a few insurance officials say that the relaxation in foreign ownership would enable foreign insurers to buy out their cash-strapped Indian partners, especially when joint ventures need growth funding.

Ageas Federal would look to hike its stake to 74%, says managing director and CEO Shahane. Ready to buy out Indian partners’ shareholdings, he says that IDBI Bank, which has already sold a 23% stake to Belgium parent Ageas, could look at exiting or further diluting its existing 25% shareholding in Ageas Federal.

“Indian partners that are likely to give foreign partners an additional stake would be those where the foreign shareholding is already at 49%,” he says.

It is not just IDBI Bank – quite a few other Indian players are looking to exit their insurance ventures. There are reports of Dabur wanting to exit from its life insurance venture with Aviva. Likewise, Future Group has been in discussions to exit from its insurance venture, Future Generali. Interestingly both global insurers – Aviva and Generali – have initiated discussions to exit the Indian market. With the relaxation in foreign ownership on the horizon, other global insurers could enter the Indian market and acquire an existing player.

“Implementation will be a challenge, especially in terms of valuations and control, but these would be internal issues for each company to address,” says Shahane. “The pace of M&A activity among insurers is further anticipated to increase, with the consolidation taking place among public sector banks.”


The mega-mergers of public sector banks, which individually have shareholdings in insurance companies, would trigger the need for other shareholders to buy out the banks’ stakes. This is because of the regulatory limits on shareholding in multiple insurance companies.

The merger of Union Bank of India with Bank of Baroda would hence see the new combined entity having to pare down its shareholding in one of the two insurance ventures. Union Bank has a 25.1% stake in Star Union Daiichi Life, while Bank of Baroda holds a 44% stake in IndiaFirst Life Insurance Company.

“Indian public sector banks are ideally placed to capitalize on the relaxation of foreign ownership for two reasons,” says Misra. “First, the quality of their insurance ventures is quite good, presumably because of the superior distribution infrastructure. Secondly, a lot of the public sector banks require capital for their banking business, and hence this gives them a good opportunity to monetize their investment.

The fine print is awaited, but the industry is optimistic that this long-pending demand offers many great opportunities, and comes at an opportune time. What remains to be seen is the timely implementation. This budgetary proposal would require an amendment to the Insurance Act, 1938, which would require the approval of the parliament and receipt of presidential assent.

When the government proposed increasing the foreign investment cap to 49%, it took more than 60 days for the act to be amended. The latest proposal to relax foreign ownership would give control to foreign insurers and hence the law could take more time to amend. But given how the government has thrown its weight behind this policy, it is hoped this will not be an impediment. subscripton ad red 2022