Amendments to FDI Policy

The existing FDI policy allows foreign investment in ‘Insurance Companies and Intermediaries/Insurance Intermediaries’. However, the Life Insurance Corporation of India (‘LIC’) is governed by a different Act, the Life Insurance Corporation Act, 1956 (‘LIC Act’). The LIC Act also does not allow foreign investment in LIC.  To facilitate the Government of India’s goal to list LIC this year, the Ministry of Commerce and Industry changed the existing FDI Policy to allow foreign participation in LIC. Modifications to the FDI Policy are made for consistency and clarity. Read the article to know the Need for the latest Amendments To FDI Policy.

FDI Policy

An insurance company and intermediaries/insurance intermediaries are permitted under the current Foreign Direct Investment (FDI) Policy to receive foreign investment in the insurance sector. While such an insurance company may incorporate Life Insurance Corporation of India (‘LIC’), because the latter was established under a different statute, the Life Insurance Corporation Act of 1956 (‘LICAct’), such an insurance company does not include the former. Furthermore, the LIC Act does not contain any provisions that would permit foreign investment in the LIC.

As a result, to facilitate the Government of India’s plan to launch the Initial Public Offering (‘IPO’) of the Life Insurance Corporation (LIC) this year, the Ministry of Commerce and Industry, vide its Press Note 1 (2022 Series) dated 14 March 2022, amended the existing FDI Policy to permit foreign investment in the Life Insurance Corporation. In addition, for consistency and clarity, the amended FDI Policy includes other consequential/relevant adjustments.

Key highlights of the amendment in FDI Policy are as under

I. Definitions  

By virtue of this act, a newly formed corporation can issue equity shares as part of its capitalisation strategy.

·         Convertible Notes are now defined as having a conversion duration of 10 years, rather than the previous 5 years.

·         Indian companies include not just companies formed in India under the Companies Act, 2013, but also those formed by or under any central or state law. A society or trust not an eligible investee under the FDI Policy is specifically excluded from the revised definition.

In addition, the following definitions have been added:

In the context of employee benefit plans established or established under federal or state legislation, “Share-Based Employee Benefits” refers to the issuance of a capital instrument to employees in accordance with the terms of the plan. It is stipulated in the Companies Act, 2013 that the term “subsidiary” shall be understood in the same manner as it is defined in that statute.

II. Real Estate Business

·         One prohibited sector under the current FDI policy is ‘Real Estate Business or Farmhouse Construction’.

·         Foreign direct investment (FDI) is forbidden solely in real estate businesses with land and immovable property intending to make money. Excluded from a real estate business definition is foreign participation in Real Estate Investment Trusts (‘REITs’) registered and regulated under the REIT Regulations, 2014.

III. FDI in Insurance

·         As long as the criteria and conditions of the automatic route are met, foreign direct investment (FDI) up to 20% is permitted in LIC.

·         Under the automatic method, FDI in Indian Insurance expanded from 49 per cent to 74 per cent, subject to the criteria outlined in the terms and conditions of the agreement.

Present FDI Norms for Neighbouring Countries

According to a government official, the number of pending investment proposals from countries that share a land border with India has reduced by one-third in the last four months as the government has sped the approval process to promote manufacturing and boost economic growth.

According to an unidentified official, it is also proposing a 25 per cent “beneficial ownership” criterion for investments from certain countries to determine whether or not they should be subjected to an approval procedure.

According to the official, the number of investment offers received from neighbouring countries has decreased from roughly 170 four months ago to a current figure of approximately 115 today.

To prevent opportunistic takeovers of local enterprises by foreign investors from countries that share land borders with India, the government required prior authorisation for foreign investments from countries that share land borders with India, a requirement in April 2020.

Conclusion

To entice FDI, the Indian government has implemented a policy that allows for automatic FDI inflows of up to 100 per cent in nearly all industries and businesses. Policy on foreign direct investment (FDI) has undergone significant revisions in the last few years in order to keep India as an increasingly appealing investment destination.

Foreign Direct Investment (FDI) policy is developed by the Ministry of Commerce and Industry’s Department for Promotion of Industry and Internal Trade (DPIIT) (FDI). As a result of the Reserve Bank of India’s remittance data, it is also in charge of maintaining and managing inward FDI statistics into India.