Life in the hands of foreigners?

In December 2025, the Parliament passed an Act to allow 100 per cent foreign holding in the insurance sector. However, when the rules for it were finalised a couple of days ago, there were unexpected surprises, which went largely unnoticed in the diatribes about the bilateral trade deals with the US, and European Union. The rules allow the Government to create a special window, and sell up to 20 per cent stake in LIC, the state-owned near-monopolist in life insurance, to foreign owner(s). This will happen under the automatic route, and may possibly curtail discussions. Today, 3.5 per cent of LIC’s stake is held publicly, and Sebi wants the public holding to be 10 per cent by May 2027.

Selling a fifth of the stake, although it implies that the Government holding is more than 50 per cent for LIC to remain a state-owned firm, is a controversial move for several reasons. One, it can be deemed to be a surreptitious one since the Act passed in Parliament talked about 100 per cent ownership in the insurance sector but there was minimal reporting about a sizable foreign holding in LIC. To be fair, the official reasoning is that this is a way to allow LIC to meet the Sebi requirement, if the shares are sold as an offer for sale, a route taken by promoters, and existing shareholders to exit profitably in IPOs (Initial Public Offerings).

But most critics are likely to argue that like the Government sold 3.5 per cent through an IPO, it could have done the same to increase the public holding to 10 per cent. There was no need for foreign ownership. Selling 20 per cent in a single block to a single foreign insurer will change the operations and mindset of LIC, as well as the manner the investors look at the stock. With the appointment of some directors, even if they are in minority, by the foreign insurer, there will be influence on the boards, and the decision-making purpose.

As a counter, the Government will retort that 20 per cent is a minority stake, which does not give any undue powers to the foreigner. Under the Companies Act, a minimum 26 per cent is required to block certain crucial decisions in the board and shareholders meetings. Thus, the foreign holder will be a passive investor, more like any other institutional holder. But there are ways that the foreigner will inculcate global best practices in LIC, and professionalise it in many ways. From a public holding of 3.5 per cent to a foreign holding of 20 per cent will imply that the Government stake will be down to 76.5 per cent.

One needs to look at the reactions of the trade unions in the financial and banking sector. They have regularly opposed the dilution of the Government’s stake in the profitable and massive public sector. In the 2022 IPO, they staged strikes and protests, and argued that the dilution of 3.5 per cent was the first step towards privatisation, threatened job security of the employees and stakeholders, undermined LIC’s social security objectives and, of course, undervalued the company. Inevitably, selling the family jewels for a song is implicit and explicit in such cases.

At that time, the valuation of LIC was deemed to be `6,00,000 crore given the price band of `900-950. Today, with the public listing, the market cap is a bit lower, or just higher than `5,50,000 crore. A sale of 20 per cent can fetch a minimum of more than `1,00,000 crore, or higher if the buyer pays a premium to get into a monopoly sector. Given the revenue constraints the Government faces, this will enable it to raise a huge sum, and counter that LIC remains under state control. One will need to watch the price that is fixed for the shares.

When the insurance Act was passed in December 2025, several less-debated rules were included. Some of them related to the foreign ownership in the sector. The relaxation of the FDI cap, from 74 per cent to 100 per cent, was tied to a requirement of “having Only One individual among the Chairperson, Managing Director, or Chief Executive Officer… as a resident Indian citizen.” In addition, the provision for insurers with more than 49 per cent foreign stake to appoint half of the directors as independent ones was removed. The new rules mandated only three independent directors.

Other requirements on the insurers with majority foreign holding were relaxed. These related to the residency of the directors, prior approval of the (insurance) regulator for repatriation of dividend, and composition of the board as per the regulator’s rules. The term, insurance business, was clearly defined as a business for insurance contracts. The new law allowed the mergers of an insurance business with non-insurance ones, albeit with the approval of the regulator. Specific mechanisms will be in place for amalgamation and transfer of the two businesses. The minimum capital for foreign reinsurance was reduced to a fifth.

At present, there is a lack of clarity on whether some of these changes will apply to LIC after the 20 per cent foreign ownership, if, and when it happens. Although the law states that most of these are applicable in cases where the foreign ownership is more than 49 per cent, or majority one, one is not sure if LIC will remain an exception to these rules. If the Government wants active investors, or foreign insurers, it will need to give them additional incentives to do so, especially if the seller wishes to extract huge premiums. If the aim is to woo passive investors, they may be interested in the returns, and not the operations.

Critics argue that hiking the FDI limit to 100 per cent, or even 20 per cent FDI in LIC, is unlikely to change the ground realities in the sector. “Despite previous increases (from 26 per cent to 49 per cent to 74 per cent), insurance penetration… actually saw fluctuations, decreasing from 4.2 per cent in 2021-22 to 3.7 per cent in 2023-24, suggesting that more foreign capital does not automatically equate to higher market penetration,” states one view. In effect, ownership does not matter.

Another opinion is that the foreign owners are hugely focused on profitability, and efficiency, and impose stricter norms on new policyholders, and claims settlement. Recently, the Economic Survey took stinging blows at the insurance sector. It warned that internal operational dynamics pose a “risk to the core financial strength of the insurers.” The margins of private life insurers are squeezed, and non-life ones rely on investment incomes to subsidise insurance.