At a time when the UPA looks at least mildly certain to increase the foreign investment limit in the insurance sector to 49 per cent (from the existing limit of 26 per cent) - under the much anticipated Insurance Laws (Amendment) Bill, 2008 (Insurance Bill), proposed to be taken up by the parliament in the budget session, the current regulatory regime governing FDI in insurance broking is dismal and far from satisfactory; and going by the text of the Insurance Bill, it seems likely that the blues will continue to pervade insurance brokers looking to raise foreign capital.
The Department of Industrial Planning and Promotion (DIPP), the nodal agency responsible for making policy pronouncements on FDI considers insurance broking as falling within the scope of ‘financial services’, as such term is understood under the FDI Policy. Since there is no specific prescription made applicable to FDI in insurance broking companies under the FDI Policy, the view resting within the portals of the DIPP is that ‘any foreign investment’ in the insurance broking space would require prior FIPB approval, regardless of the amount or extent of foreign ownership involved!
When the extant FDI norms for investments in the “insurance sector” permit FDI up to 26 per cent on the automatic route (thereby implying the absence of any FIPB approval) why are foreign investments in “insurance broking” companies subjected to the adverse and excessive standard of requiring FIPB approval? Interestingly, the answer to this question lies in the manner in which the DIPP construes the term “insurance sector” itself - as used (but not defined) in the FDI Policy.
As per the DIPP, the term “insurance sector” featuring under the FDI Policy should be narrowly construed in context of the term “Indian Insurance Company”, as defined under the Insurance Act, 1938 (Insurance Act). Such an interpretation successfully manages to exclude insurance intermediaries and insurance broking companies from the definition of “Indian Insurance Company”, as the definition of such term in the Insurance Act is limited to only those companies which carry on the businesses of life insurance, general insurance and re-insurance. The DIPP’s approach is surprising, and palpably, without merit and going by the DIPP’s logic of limiting FDI avenues only to “Indian Insurance Companies”, it appears that even with the enactment of the Insurance Bill, the conundrums facing FDI in insurance broking may still not get pacified. This is because the definition of “Indian Insurance Company” under the Insurance Bill substantively remains the same as the definition provided under the Insurance Act (other than the changes to the FDI limit in such companies).
Suffice to say, in treating cases involving FDI in insurance broking, the DIPP (not a legislative body) has made an intended classification between foreign investments in mainstream insurance companies and in insurance intermediaries (including, insurance brokers). In a country where even the Constitution abhors any kind of classification not based on intelligible differentia, there is clearly a lack of any intelligible differentia when it comes to this classification introduced by the caprice of the DIPP.
In cases where the FDI inflow is proposed to take place through a secondary purchase, other unwarranted complications follow! Interestingly enough, while DIPP considers insurance broking as a class of ‘financial services’ under the FDI Policy, the RBI regulations governing foreign investments into India define “financial services” far more strictly as compared to the FDI Policy. On account of this diversion in approach between the DIPP and the RBI, a possible reading of the RBI regulations could create an obligation of obtaining prior RBI approval as a condition to the purchase of shares of an insurance broking firm by a foreign investor. This discrepancy only adds further fuel to the fire in the convoluted set of regulations governing FDI in insurance broking.
While it is true that the Indian insurance broking sector has not attracted much attention from foreign investors - when compared to the number of active joint ventures in the mainstream insurance business, it would also be fair to add that the government’s apathetical attitude to the sector has not helped this sector either. At a time, when the government seems keen on augmenting FDI inflows in the Indian insurance sector, perhaps it would be merit sense to bring insurance broking at par with mainstream insurance businesses from the standpoint of FDI policy prescription and accompanying RBI regulations. After all, a uniform and consistent approach applied across the insurance sector will only boost the consolidated growth of the Indian insurance industry.
Sidharrth Shankar is a Partner and Vatsal Gaur is an Associate with J. Sagar Associates. The views of the authors are personal
