Parliament passed the General Insurance Business (Nationalisation) Amendment Bill, 2021 on August 11. This amendment marks the end of State control over general insurance companies and ushers in an era of greater private participation in general insurance sector. The Bill amends the General Insurance Business (Nationalisation) Act, 1972 that nationalised all general insurers and amalgamated 107 insurance companies into the State-owned General Insurance Company.
The liberalisation of the 1990s saw the introduction of private players in the insurance sector. As the economy was liberalised, in 2002 further amendments were made to the 1972 Act, under which the government was mandated to maintain at least 51 percent shareholding in the four general insurance companies.
The 2021 Bill introduces three key amendments to the 1972 Act that will facilitate greater private shareholding and become a driver for the deals in the sector.
First, it omits the requirement of the government mandatorily holding 51 percent shareholding in the public sector general insurance companies. Second, it enables the government to relinquish its control over a general insurance company, such that it will cease to appoint a majority to the board of directors or control its management and policy decisions. It further provides that the Act shall cease to apply to general insurers from the date the government cedes control over such insurer.
Third, it recognises that such changes in control over the public sector general insurers will result in private capital (including foreign direct investment) being employed in the sector, which consequently will trigger an altered board composition. It will lead to the addition of non-executive directors nominated by the private shareholders. In order to provide for greater accountability of such non-executive directors, many of whom may be non-residents, the amendment recognises that they shall be liable for any acts of omission or commission committed with their knowledge, that is attributable to them through the board processes, and which have been committed with their consent or connivance, or where they failed to act diligently.
The 2021 Bill read with the recent amendments to the Insurance Act, 1938, that increase the limit to foreign direct investment (FDI) in insurance companies to 74 percent as opposed to erstwhile 49 percent is a welcome move.
These changes will allow the government to divest or dilute its stake in favour of private shareholders. Altered corporate governance structures will allow the powers of the government over general insurers (with more than 50 percent private shareholding) to be transferred to the board of directors. This will ensure greater accountability and better governance, and access to a broader talent pool.
Greater private participation will lead to an increase in competition, better pricing of insurance products, and the introduction of innovative products. This will enhance the choice for policy holders, and provide them better customer service and claims settlement experience.
Equally, those opposing the 2021 Bill have raised concerns that greater private participation will lead to neglect of priority sector products aimed to benefit the rural population and the underprivileged. However, if the general experience of the private participation in other sectors is used as a yardstick, overall privatisation has led to greater customer choice, improved pricing, and the removal of information asymmetry.
Overall, the changes brought about by the 2021 Bill are likely to create deal momentum and trigger transactions involving divestment of the government’s stake in the public sector general insurers. The liberalised FDI caps in insurance and the ability to acquire control over the insurer’s board will further improve the sector’s attractiveness to FDI. This in turn can help generate enhanced resources required by the sector as the Indian economy grows and emerges from the ravages of the pandemic.
Shinoj Koshy is partner at L&L Partners’ Law Offices.
Views are personal and do not represent the stand of this publication.
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