GS Paper - 3 (Economy)

The government has amended the Foreign Exchange Management (non-debt instruments) Rules, 2019 to enable the increase in foreign direct investment limit in the insurance sector to 74 per cent.

What

  1. According to the Foreign Exchange Management (non-debt instruments) (second amendment) Rules, 2021, applications for FDI in private banks having joint ventures or subsidiaries in the insurance sector may be addressed to the Reserve Bank of India for consideration in consultation with the Insurance Regulatory and Development Authority of India to ensure that the limit of foreign investment of 74 per cent for the insurance sector is not breached.
  2. In May, the finance ministry had notified the Indian Insurance Companies (foreign investment) Amendment Rules, 2021 that require insurers with foreign ownership of over 49 per cent to maintain a solvency margin of 180 per cent if they declare dividend payments in a financial year.
  3. According to the notified rules, if insurance companies--with foreign ownership above 51 per cent--repatriate profit in the form of dividend to their shareholders, but cannot meet the 180 per cent margin requirement, they will have to set aside 50 per cent of their net profit in a general reserve.
  4. The rules also require such insurance companies to have 50 per cent of their directors as independent directors unless the chairperson of its board is herself or himself one.
  5. In that case at least one-third of its board should have independent directors.
  6. Foreign-owned insurance companies are also mandated to have the majority of its directors and key management persons as resident Indians.