The Indian government seems to have overstepped its boundary on extending foreign direct investment (FDI) limits for insurance intermediaries, industry experts say.
Welcoming the notification of rules relating to FDI in the insurance sector by the central government Friday, officials feel the approval process could have been simplified a bit.
As per the notified rules, FDI in insurance sector will be under automatic route up to 26 percent and anything above that limit up to 49 percent would be with the permission of the foreign investment promotion board (FIPB).
The rules also stipulate that FDI cap of 49 percent applicable to insurers would also be applicable to intermediaries like insurance brokers, third party administrators, surveyors and loss assessors and others.
Referring to the extension of FDI limits to intermediaries Supreme Court advocate and an expert in insurance/company/completion laws D. Varadarajan told IANS: "The Executive seems to have overstepped the rule making power provided under section 114 of the Insurance Act as amended by the Insurance Ordinance, 2014."
He said under the amended insurance law the central government has been invested only with the additional power to make rules as regards the manner and control of "Indian Insurance Company" as redefined under the Ordinance.
"In my considered opinion, this is an instance of avoidable Executive excess or over-reach, the vires of which is suspect," he added.
Citing the banking sector where FDI is under automatic route up to 49 percent, a senior industry official preferring anonymity told IANS: "Already we have to get the permission of insurance regulator for increasing capital. The government has now added one more bureaucratic layer in the form of FIPB permission."
As per the notification, any increase of foreign investment of an Indian insurance company shall be in accordance with the pricing guidelines specified by the Reserve Bank of India under the Foreign Exchange Management Act (FEMA).
According to Varadarajan, the reckoning of 49 percent foreign invest is a complex and compound proposition under the rules.
FDI includes investment by non-resident entities/persons resident outside India and other eligible entities in the equity shares of an Indian Insurance Company under the relevant FEMA Regulations, 2000, as per the notified rules.
Furthermore, FDI also includes investment by foreign venture capital investors and portfolio investments - investments in the equity share of an Indian insurer by foreign institutional investors, foreign portfolio investors, Non-Resident Indians, qualified foreign investors and other eligible portfolio investor entities or persons in accordance with provisions of FEMA Regulations, 2000.
"Thus, for reckoning the 49 percent limit all the above would be aggregated," Varadarajan said.
However in case of a bank allowed to function as an insurance intermediary, the foreign equity investment caps applicable in that sector (banking) shall continue to apply, subject to the condition that the revenues of such entities from their primary (i.e. non-insurance related) business must remain above 50 percent of their total revenues in any financial year.
Industry officials told IANS that the notification has aligned the definition of control of Indian insurance company with that of the insurance ordinance issued earlier.
"This will put into difficulty some of the insurers where the foreign joint venture partner is in the driver's seat with the Indian promoter being a 'passive' investor," a senior industry official told IANS.
The rules defines Indian control of an Indian insurer to mean control by resident Indian citizens or Indian companies, which are owned and controlled by resident Indian citizens.
The rules also defines the term 'Indian ownership' of an Indian Insurance Company to mean more than 50 percent of the equity capital in it is beneficially owned by resident Indian citizens or Indian companies, which are owned and controlled by resident Indian citizens.
"Thus, the rules have cleared the cobweb in regard to the import and purport of 'Indian owned and controlled' conundrum," Varadarajan said.
