FEMA amendment rules, 2021

Relevance

• GS 3: Effects of liberalization on the economy

Context

• The Finance Ministry has notified amendments to the Foreign Exchange Management (FEMA) Rules to increase in limit on Foreign Direct Investment (FDI) in the insurance sector to 74 per cent.

Key points

• Currently, the cap on FDI in the insurance sector is 49 per cent.
• Earlier in May, the government had notified the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2021.
• Under the Foreign Exchange Management (non-debt instruments) (second amendment) Rules, , insurers with foreign ownership above 51 per cent and those who repatriate profit in the form of dividend to their shareholders, but cannot meet the 180 per cent margin requirement, they will have to set aside 50 per cent of their net profit in a general reserve.
• In the Budget 2021-22, the Parliament approved the raising of FDI limit in insurance from present 49 per cent to 74 per cent.
• To be able to enhance FDI to 74 per cent level, companies would be required to have minimum 50 per cent independent directors on the board unless the chairperson of its board is herself or himself one.
• Foreign-owned insurance companies are also mandated to have the majority of its directors and key management persons as resident Indians.
• The safeguards are similar to the requirements prevalent for the telecom sector that include
  • appointing majority resident citizens on the board of the Indian insurance company and
  • ensuring that atleast one amongst the chief executive officer, managing director or chairperson is a resident Indian citizen.

Phasing Out of LIBOR

About FEMA Act

• The Foreign Exchange Management Act, 1999 (FEMA) was passed by the parliament to consolidate and amend the law relating to foreign exchange by replacing Foreign Exchange Regulation Act (FERA).
• The objective was to facilitate external trade and payments, and promote the orderly development and maintenance of foreign exchange market in India.
• It is in line with the WTO (World Trade Organisation) framework.
• No financial transactions concerning foreign securities or exchange can be carried out without the approval of Foreign Exchange Management Act.
• According to this Act, a person resident in India can hold, own, transfer or invest in any immovable property situated outside India if such property was acquired, held or owned by him/ her when he/ she was resident outside India or inherited from a person resident outside India.

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