FEMA Amendment 2026: India Liberalises Foreign Investment in Insurance Sector

The Reserve Bank of India has notified amendments to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, giving effect to the Insurance Laws (Amendment) Act, 2025, which raised the foreign direct investment (FDI) cap in Indian insurance companies from 74 per cent to 100 per cent. The FEMA amendments, notified in March 2026, prescribe the conditions under which 100 per cent FDI is permitted and establish a new regulatory framework for fully foreign-owned insurance entities operating in India.

Evolution of FDI in Indian Insurance

Foreign investment in Indian insurance has undergone a phased liberalisation since the sector was opened to private participation in 2000. The Insurance Regulatory and Development Authority Act, 1999 initially capped foreign investment at 26 per cent. The Insurance Laws (Amendment) Act, 2015 raised this limit to 49 per cent under the automatic route. Subsequently, the Union Budget 2021-22 announced a further increase to 74 per cent, implemented through the Insurance (Amendment) Act, 2021, which required that the majority of directors and key management persons be resident Indians. The Insurance Laws (Amendment) Act, 2025, passed by Parliament in the Budget Session, removed the cap entirely and allowed 100 per cent FDI subject to conditions prescribed by the IRDAI and the RBI.

Conditions for 100 Per Cent FDI

The amended FEMA Rules permit 100 per cent FDI in insurance companies through the automatic route, subject to several conditions. First, the insurance company must be incorporated in India under the Companies Act, 2013 and must maintain its registered office in India. Second, the company must comply with a net owned fund requirement as prescribed by the IRDAI, which ensures that a minimum quantum of capital is retained within the Indian entity. Third, where foreign investment exceeds 49 per cent, the insurer must ensure that a specified percentage of profits is retained as general reserves to support policyholder protection. The IRDAI has prescribed that insurers with FDI exceeding 49 per cent must retain at least 50 per cent of their net profits as general reserves until such reserves equal the paid-up equity capital.

Fourth, the amended rules require that a majority of the board of directors of an insurance company with FDI exceeding 74 per cent must be Indian residents, and the appointed actuary and principal officer must be resident Indians. This condition ensures continued domestic oversight even in fully foreign-owned entities. Fifth, all investments of policyholders' funds must be made within India in compliance with the investment regulations prescribed by the IRDAI under the Insurance Act, 1938.

FEMA Compliance Requirements

The FEMA amendments require that foreign investment in insurance companies be reported to the RBI through the Foreign Investment Reporting and Management System (FIRMS) within the prescribed timelines. Investments must comply with pricing guidelines under Rule 21 of the Non-Debt Instruments Rules, which require that the price of shares issued to a foreign investor not be less than the fair market value determined by a SEBI-registered merchant banker or a chartered accountant using internationally accepted pricing methodologies. For unlisted insurance companies, the valuation must follow the discounted cash flow method as prescribed by FEMA regulations.

Additionally, downstream investment by an Indian insurance company that is owned or controlled by a foreign entity will be treated as indirect foreign investment in the downstream entity, in accordance with the Press Note 3 of 2020 series. This has implications for insurance companies seeking to set up subsidiary or associate entities for health insurance, reinsurance, or insurance broking.

Impact on the Insurance Market

India's insurance penetration stood at approximately 4 per cent of GDP in 2025, significantly below the global average of 7 per cent. The government has set a target of achieving 6 per cent insurance penetration by 2030 as part of its financial inclusion objectives. The liberalisation of FDI to 100 per cent is expected to attract major global insurance groups that had previously operated in India through joint ventures with Indian partners. Several global insurers have already indicated interest in increasing their stakes in existing Indian joint ventures to take full ownership, which would allow them greater operational control and faster deployment of capital and technology.

The FEMA amendments, read with the Insurance Laws (Amendment) Act, 2025, represent the final stage of India's three-decade journey toward full liberalisation of its insurance sector. Legal and compliance teams at insurance companies with foreign promoters should review their shareholding structures, board composition requirements, and reporting obligations under the amended FEMA framework to ensure compliance with the new regime.