Both the Lok Sabha and the Rajya Sabha have earlier this month on 3 March 2015 passed the Insurance Amendment Bill 2015 (`Insurance Bill`). The Insurance Bill now awaits the presidential assent. Insurance Bill majorly amends the Insurance Act, 1938, the General Insurance Business (Nationalization) Act, 1972 and the Insurance Regulatory and Development Authority (IRDA) Act, 1999.

On 26 December 2014 Insurance Laws (Amendment) Ordinance, 2014 (Insurance Ordinance) was effected to bring about these changes to the insurance laws including increase in the foreign direct investment (`FDI`) limits. Upon receipt of the presidential assent the Insurance Bill will replace the Insurance Ordinance. The Insurance Bill is in line with the Budget Speech of 2015 and the Ordinance. It seeks to create an investor friendly environment in country to achieve investment, economic growth and job creation in the insurance sector.

The amendments that are brought about by the Insurance Bill to various insurance legislations are as mentioned herein below:

1. Increase in FDI Limit:

   With the intend to boost insurance sector, the FDI in insurance companies raised from the earlier cap of 26% to 49%. The Foreign Investment upto 26% will fall under automatic route while any further investment upto 49% will attract government route. 49% cap shall include direct, indirect as well as foreign portfolio investment. Further, bifurcation is provided for Foreign Portfolio Investment to include foreign institutional investors, qualified financial investors, foreign portfolio investors and non-resident investors. It is further clarified in the Press Note that the foreign company bringing in capital shall be required to obtain requisite licenses from the Insurance Regulatory Development Authority of India (`IRDA`).

2. Ownership and Control:

   Indian insurance Company has to ensure that the ownership and the control at all times remain in the hands of the resident Indian entities. The definition of ownership and control will be the same as defined under the FDI Policy.

3. Inclusions:

   FDI limits in the insurance sector would be applicable to insurance brokers, third party administrators, surveyors, loss assessors and other insurance intermediaries appointed under applicable IRDA regulations.

   FDI Policy was silent on the applicability of the FDI limits in intermediaries. Certain specific regulations governing the intermediaries other than those specified therein. However, now with the mention of `other insurance intermediaries` this ambiguity has been addressed as it is made clear that FDI limits are applicable to all intermediaries.

4. Banks as Insurance Intermediary:

   A bank functioning as an insurance intermediary has been exempted from applicability of FDI limits. However, this exemption is only available to banks if their revenue from insurance related business is more than 50 % of their total revenues during the financial year. The provisions under paragraphs 6.2.17.2.2(4) (i) (c) & (e) which related to the Banking Private Sector shall be applicable in respect of the bank promoted insurance companies.

5. Industry Councils:

   Life Insurance Council and General Insurance Council are are made self regulating bodies to frame the bye laws for elections, meetings levy and collect fees etc.

6. Powers of IRDA:

   IRDA is entrusted with additional responsibilities of appointing insurance agents to insurers. IRDA is now to regulate their eligibility, qualifications and other aspects. IRDA is now empowered to regulate the key aspects of the operations of insurance companies in areas of solvency, investments, expenses and commissions to formulate regulations for payment of commission and control of management expenses. Authority is given to regulate functions, code of conduct etc of assessors and loss surveyors. The scope of the insurance intermediaries is expanded to include insurance brokers, re insurance brokers, insurance consultants, corporate agents, third party administrators , surveyors, loss assessors and such other entities as may be notified from time to time.

7. Securities Appellate Tribunal:

   The appeals against the decisions of IRDA shall lie with the Securities Appellate Tribunal set up under the SEBI Act, 1992.

8. Penalties:

   The penalties for defaults have been raised to Rs. 25 crores and imprisonment upto 10 years in certain cases. These penalties are levied safeguard the interests of consumers.

MHCO COMMENT

It is interesting to note that as per the IRDA`s annual report of the year ended 2014 - out of 23 private life insurers, more than 20 had foreign investment of above 22% and out of 17 non-life insurers in the private sector, 14 had more than 22% foreign investment. However, the Indian insurance sector has not seen growth for a long duration of time for the paucity of funds. The Insurance Bill is therefore beneficial for the economic growth of the country as it will encourage foreign investments in the insurance sector in India which is the need of the market.

This update was released on 28 Mar 2015.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

Legal Update Team
MANSUKHLAL HIRALAL & COMPANY
Advocates, Solicitors and Notaries
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