India Eyes Increased Foreign Investment in Insurance
New Delhi, March 4, 2025 – The Indian insurance sector is poised for a significant transformation following the Finance Minister’s recent announcement. On February 1, 2025, the government proposed increasing the foreign direct investment (FDI) limit in the sector from the current 74% to 100%. This potential change offers considerable opportunities for international investors in one of the world’s fastest-growing insurance markets.
The Indian insurance market has experienced robust growth over the past two decades. However, insurance penetration in India remains relatively low, at approximately 3-4%. This contrasts with a global average of around 7% and an average of 13-15% in developed nations. This disparity suggests significant potential for growth and innovation, especially given India’s expanding population, economy, and middle class.
India has gradually liberalized its FDI policies in insurance. Initially, a 26% FDI cap was introduced in 2001, which was raised to 49% in 2015 and further to 74% in 2021. Beyond these percentage limits, foreign investment in the Indian insurance sector currently faces certain regulatory requirements. These ‘guardrails,’ imposed by the Insurance Regulatory and Development Authority of India (IRDAI), can apply to companies with significant foreign ownership.
For instance, foreign investment exceeding 49% (up to the current 74% limit) may require a majority of independent directors on the board of the Indian business. Furthermore, senior executives of the Indian insurance business may need to be Indian citizens, which can limit the ability of global investors to place senior management with international experience within the Indian entity.
A larger stake, greater than 49%, can also lead to higher solvency requirements, potentially putting those businesses at a competitive disadvantage.
The proposal to allow 100% FDI in insurance is subject to consultations and approvals within the Indian government, including validation from the IRDAI. Certain conditions are likely to be implemented alongside the policy, such as requirements for the investment of all premiums from the Indian insurance business within India, although repatriation of dividends may be permitted. However, it is understood that the Indian Ministry of Finance is considering relaxing some of the existing regulatory ‘guardrails’ to attract further investment.
From a corporate governance standpoint, increasing foreign ownership above the 75% threshold would also relieve the investor from minority shareholder protections that apply below that level. This would potentially empower the investor to unilaterally approve actions that currently require minority influence, including changes to company charters, issuance of new shares, mergers and acquisitions, and share buybacks.
The ability to fully own an insurance or reinsurance business in India offers considerable flexibility to potential foreign investors. It eliminates the need for partnerships with local entities, though such partnerships may still be strategically beneficial for foreign investors aiming to enter or expand within the Indian insurance market.
Should the proposal be implemented, the change could also lead to a restructuring of current joint ventures between foreign investors and their Indian partners. Foreign investors, previously limited to 74% ownership, may seek to increase their stake to 100% to secure greater control of their Indian subsidiaries. This shift would also broaden the range of potential buyers for Indian insurance businesses.
In the meantime, foreign investors can still invest up to the existing 74% FDI cap. Another option is investing in India’s special economic zone, the Gujarat International Finance Tec-City (GIFT City), designed to be India’s first international financial services center. Foreign investors can establish entities in GIFT City to offer foreign currency-denominated insurance and reinsurance products to both Indian and international customers. GIFT City provides various incentives, including tax and regulatory exemptions.
The potential increase to 100% FDI in India’s insurance sector represents a significant development for foreign investors seeking to capitalize on the Indian market’s vast potential. The proposal remains subject to change as it moves through the approval process.
