The government has notified the rules pertaining to amended insurance laws that seek to raise foreign direct investment (FDI) limit in the insurance sector to 74 per cent from the current 49 per cent.

The rules have linked higher investments to higher solvency margin — which is the excess of value of assets and liabilities of an insurer — while resident Indian citizens should comprise the majority in the board.

Analysts said the ownership and control issue could act as a stumbling block before global insurers to increase their stakes as they would not have the management control in the firm despite putting in the money.

An insurer with foreign investment exceeding 49 per cent and which pays dividends must have solvency margin at 1.2 times the control level of solvency, which is set by the regulator as the desired solvency margin. Otherwise at least 50 per cent of the insurer’s net profit must be kept in the general reserve.

Besides, not less than 50 per cent of the directors shall be independent directors.

If the the chairperson is an independent director, at least one-third of the board can be independent directors.

The rules say majority of directors, key management persons and at least one among the chairperson of the board, managing director and chief executive must be a resident Indian.

An insurer with more than 49 per cent FDI will have a year to meet these requirements under the Indian Insurance Companies (Foreign Investment) (Amendment) Rules, 2021.

Total foreign investment would mean the sum of both direct and indirect foreign investment. Direct investment by a foreigner will be called foreign direct investment, while investment by an Indian company (which is owned or controlled by foreigners) into another Indian entity is considered as indirect foreign investment.

“While the rules would open up the sector, foreign insurance firms would be cautious in picking up or increasing stakes due to ownership and management control issues. However, global financial investors would still find it lucrative to invest, given the low penetration and growth prospects,” Atul Pandey, partner, Khaitan & Co LLP, said.