The Union Budget 2025-26 has been presented in the Lok Sabha, sparking reactions from across India.
The commenting on FDI limit in insurance sector Shailaja Lall, Partner, Shardul Amarchand Mangaldas & Co said:
The Union Budget for 2025-26, presented today by Finance Minister Nirmala Sitharaman, has introduced several key reforms, with one of the most notable being the proposal to increase the Foreign Direct Investment (FDI) limit in the insurance sector to 100%. This move underscores the government’s commitment to liberalizing the insurance market and boosting foreign investment, aligning with its broader objective of enhancing the ease of doing business in India.
Allowing 100% FDI means foreign insurers will no longer be required to partner with Indian entities or navigate joint venture agreements that affect control and decision-making rights. This is expected to significantly enhance FDI inflows into the sector, attracting global insurance players who were previously deterred by ownership restrictions.
However, the proposal appears to comes with an important caveat that the increased FDI limit applies only to companies that invest the entire premium collected within India. This condition is somewhat ambiguous, given that insurance companies are already prohibited from investing policyholder funds outside India, either directly or indirectly. It is possible this stipulation is specifically targeted at companies operating in the GIFT City, where regulatory frameworks differ slightly to promote international financial services.
The Economic Survey 2024-25, tabled yesterday, highlighted a concerning decline in insurance penetration from 4% to 3.7%, despite previous reforms aimed at expanding the reach of insurance across the country. The proposed bill also draws on several provisions from the Insurance Amendment Bill, 2022, which sought to overhaul India’s insurance and reinsurance landscape. Key features include allowing composite insurance licenses—enabling insurers to offer life, general, and health insurance under a single entity—and easing restrictions on agents, permitting them to sell products from multiple insurers.
These reforms are expected to increase competition, drive innovation, and foster the development of diverse insurance products tailored to the varied needs of the Indian market. However, the full impact of these changes will depend on the specific conditions attached to the FDI increase and how the proposed amendments to the Insurance Act, 1938, are debated and finalized in Parliament.
Overall, while the infusion of foreign capital and new market entrants could energise and invigorate the sector, it remains to be seen whether these reforms will successfully address the challenges of insurance penetration and market accessibility in India.
