FM's Clause On Control Is A Cause For Concern

While announcing a 74 per cent hike in Foreign Direct Investment (FDI) in the insurance sector, Finance Minister Nirmala Sitharaman also added that "The majority of directors on the board and key management persons would be resident Indians with at least 50 per cent of the directors being independent directors and a specified percentage of profits being retained as general reserves."

This has created a sense of uncertainty and anticipation among experts as to how the move would be implemented by the government.

"What needs to be seen now, is how soon the government and the insurance regulator announce the revised framework about the control and management of insurance companies. We are anticipating restrictions about nationality and residency of directors and certain KMP, related party transactions, and perhaps the repatriation of dividends," said Indranath Bishnu, Partner, Cyril Amarchand Mangaldas.

"When the insurance sector liberalised from 26 per cent to 49 per cent in 2014, it took more than a year for the necessary guidelines to come in place, and once they did, they had their own share of interpretational challenges. The process was relatively faster, and positions clearer, when FDI in insurance intermediaries was liberalised to 100 per cent in 2019. A close watch needs to be kept for the next few weeks and, as usual, the devil will lie in the detail," added Bishnu.

Some feel the announcement would lead to foreign investors taking a cautious approach.

"Whilst this is a welcome move by the government, foreign investors will certainly view this development with a pinch of salt’ and like to take a cautious approach. Much will depend upon the fine print of the conditions being proposed. Once there is more clarity, it will need to be seen as to how many foreign investors are willing to infuse capital, without the ability to control the board," said Shailaja Lall, partner, Shardul Amarchand Mangaldas & Co.

"Any conditionality and regulatory approvals attached to payment of dividends to foreign investors may add another level of complexity. The insurance regulator may also prescribe certain conditions to safeguard policyholder money," noted Lall.