Draft Indian Insurance Companies (Foreign Investment) Amendment Rules, 2025: A Fine-Turning Point For India's Insurance Sector (Podcast)

Introduction

As part of a major reform aimed at reshaping India's insurance landscape and attracting global capital, the Ministry of Finance, through the Department of Financial Services, published a draft notification on the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2025¹ ("Draft Rules") on August 29, 2025. These draft Rules seek to amend the Indian Insurance Companies (Foreign Investment) Rules, 2015 ("2015 Rules").

The draft notification is being viewed as a strategic signal towards the long-anticipated liberalisation of India's insurance sector, with expectations of the foreign direct investment ("FDI") cap being raised from 74 per cent (seventy-four per cent) to 100 per cent (hundred per cent). From a business standpoint, this liberalisation promises to inject substantial global capital into domestic insurers and enable enhanced scalability that could accelerate market penetration. For insurance companies and corporate entities, it opens doors to deeper international investment, streamlined mergers and acquisitions and unlocks long-term value creation without the constraints of ownership caps.

Background and Policy Context for Raising FDI Limits

Historically, the FDI rate in India's insurance sector has been low. To address this and realise the vision of "Insurance for All by 2047," the Government of India, in coordination with the Insurance Regulatory and Development Authority of India ("IRDAI"), has aimed to attract greater foreign investment. Insurance is a capital-intensive sector, and increased foreign participation is expected to support economic growth while modernising the market. The Union Budget 2025-2026 announced that insurance companies, FDI limit would be raised from 74 per cent (seventy-four per cent) to 100 per cent (hundred per cent), provided that the investment is entirely directed into India. Considering these factors, the government has published the draft notification, which, once implemented, is expected to change how India's insurance sector operates fundamentally.

Proposed Changes at a Glance

Outlined below are the key amendments proposed:

1. Simplifying FDI in Insurance: The Draft Rules remove all references related to Foreign Exchange Management (Transfer or Issue of Security a Person Resident Outside India) Regulations, 2000 ("Rule 2000") and replace them with the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019² ("Rule 2019"). Under the previous system, the provisions under the Foreign Exchange Management Act, 1999 ("FEMA Act") were fragmented, creating procedural hurdles for foreign investors. By consolidating and streamlining these rules under Rule 2019, the government aims to make it easier for global investors to infuse capital into Indian insurance companies directly.
2. Automatic Route of Foreign Investment and IRDAI verification: Foreign investment proposals in Indian insurance companies will be allowed under the automatic route for the paid-up equity capital as specified in the Insurance Act, 1938, subject to verification by the IRDAI.
3. Citizenship Requirements for Insurance Companies: Under the 2015 Rules, Indian insurance companies with foreign investment were required to have the majority of their directors and key management personnel as resident Indian citizens.³ It also mandated that at least one of the top three positions, the Chairperson of the Board, the Managing Director, or the Chief Executive Officer, must be held by a resident Indian citizen. Under the Draft Rules, this requirement has been relaxed.⁴
4. Relaxation on Financial Requirements: Under the 2015 Rules, insurance companies with foreign investment above 49 per cent (forty-nine per cent) had to follow stricter conditions. If they paid dividends and their solvency margin fell below 1.2 times the control level, they had to transfer at least 50 per cent (fifty per cent) of profits to the general reserve. At least 50 per cent (fifty per cent) of the board had to be independent directors (or one–third if the Chairperson was independent).⁵ The Draft Rules remove these conditions. Once implemented, the companies will not have to set aside 50 per cent (fifty per cent) of profits in low-solvency situations or maintain a fixed proportion of independent directors. These changes are part of a broader effort to ease the regulatory requirements and simplify compliance for insurance companies with direct foreign investments.
5. Simplification for Insurance Intermediaries with Foreign Ownership: Under the new Draft Rule, sub-rules 9(3)(ii), (iii), (v) and (vi) are proposed to be omitted.⁶ As a result, insurance intermediaries with majority foreign ownership will now only need to incorporate as a limited company under the Companies Act, 2013, bring in updated technological and managerial expertise, and disclose all payments made to their group, promoter, subsidiary, or associate entities in the format prescribed by the Authority.⁷ These changes have been introduced to simplify and streamline the process for insurance intermediaries. These changes aim to simplify compliance, make it easier for foreign investors to operate in India and encourage more investment in the insurance sector.

Practical Considerations for Insurance Firms in India

Upon implementation of these new Draft Rules, Insurance Firms will need to undergo significant legal and operational adjustments. These include restructuring their organisational framework, revising long-term financial planning and strengthening risk management practices. Few practical considerations are as follows:

1. Alignment of AoA and MoA: The existing Article of Associations ("AoA") and Memorandum of Association ("MoA") of the Insurance Companies must be reviewed and updated to align with the new Draft Rule.
2. Ownership Restructuring: Insurance Companies need to change the ownership structure in their joint ventures so that foreign investors can also have control.
3. IRDAI Compliance Mandate: The company must also follow all the IRDAI rules, now and in the future, about capital, investor roles, and any changes in who owns the shares. Ensure proper verification and documentation for IRDAI review.
4. Board Structure Revision: Insurance Companies will also need to change their board structure, as once this Draft Rule is implemented, only one key leader out of the Chairperson, Managing Director, or Chief Executive Officer will need to be an Indian Resident. Manual Update of Policies: The companies' policies and internal compliance manuals must be updated to reflect the new requirements.
5. Solvency and Retention: Insurance companies must ensure they have enough money to pay claims and stay safe since the rules about saving profits have changed.
6. Reflection of Rights of Foreign Investors; It is necessary to check that foreign investors' stakes and rights are correctly reflected in the company records.
7. Audit Requirements: The company need to audit all disclosures that have an existence of promoters, subsidiaries, and associated entities to ensure formats meet IRDAI requirements.
8. Verifying Transparency in Reporting Payments: Companies must also verify transparency in reporting payments, financial transactions, and related-party dealings.

Key Takeaway

The Draft Rules proposing the removal of the foreign investment cap in India's insurance sector are poised to attract greater global participation. For insurers, this could translate into easier access to capital, improved solvency and accelerated growth. The framework also opens avenues for advanced technologies and global expertise, enabling companies to strengthen risk management, streamline operations and expand customer reach. At the same time, greater foreign involvement may dilute domestic control over ownership and strategic decision making, a factor that stakeholders must approach with caution.

Footnotes

1 Rule 1(1), Indian Insurance Companies (Foreign Investment) Amendment Rules, 2025

2 Rule 2, Indian Insurance Companies (Foreign Investment) Amendment Rules, 2025

3 Rule 4, Indian Insurance Companies (Foreign Investment) Rules, 2015

4 Rule 5, Indian Insurance Companies (Foreign Investment) Amendment Rules, 2025

5 Rule 4A, Indian Insurance Companies (Foreign Investment) Rules, 2015

6 Rule 10, Indian Insurance Companies (Foreign Investment) Amendment Rules, 2025

7 Rule 9, Indian Insurance Companies (Foreign Investment) Amendment Rules, 2025

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