Govt can completely privatise PSU Insurance Companies as Legal Restrictions Removed

The Government of India can completely privatise public sector insurance companies as the legal restriction has been removed. The General Insurance Business (Nationalisation) Amendment Bill was passed in 2021 and with the approval of this bill, the Indian government can decrease its stake in public sector general insurance companies.

Before the passage of the General Insurance Business (Nationalisation) Amendment Act, 2021, the law required the Central Government to maintain at least a 51% equity stake in state-owned general insurance companies. By completely removing this 51% floor, the government legally opened the doors for complete privatization or significant strategic disinvestment of these entities.

The General Insurance Business (Nationalisation) Amendment Bill, 2021, was passed by the Lok Sabha on 2 August 2021. The Bill amended the General Insurance Business (Nationalisation) Act, 1972. It introduced changes to the rules governing specified public sector general insurance companies.

Removal of 51% Floor: The 2021 amendment removed the mandatory requirement for the Central Government to hold at least a 51% equity stake in state-owned general insurance companies.

Relinquishing Control: It inserted Section 24B, allowing the central government to cease control and drop its shareholding below majority levels in public general insurers.

Covered Entities: The law applies to public sector general insurers including The New India Assurance Company Ltd, National Insurance Company Ltd, Oriental Insurance Company Ltd, United India Insurance Company Ltd, and General Insurance Corporation of India (GIC Re).

Moreover, to ensure there is deep corporate interest when the government decides to offload further chunks of these companies, India also elevated its Foreign Direct Investment (FDI) cap in the insurance sector to 74% and allowed up to 100% foreign ownership for insurance intermediaries. This allows global insurance giants to potentially acquire significant chunks of equity as the government gradually steps back.

What Happens When the Government Loses Control of an Insurance Company?

The amendment inserts a new Section 24B into the Act. It states that when the Central Government ceases to control a specified insurance company, the provisions of the General Insurance Business (Nationalisation) Act, 1972, will no longer apply to that company.

In such a situation, any scheme previously introduced by the Central Government for that company will be treated as having been adopted by its board of directors. The board can make changes to the existing scheme or introduce a new policy. It will also exercise the powers previously exercised by the government under the relevant scheme, subject to applicable laws.

The amendment defines government control as the right to appoint a majority of the company’s directors or the power to influence its management or policy decisions through shareholding rights, management rights, shareholder agreements, voting agreements or other agreements.

Liability of Non-Whole-Time Directors

The amendment introduces a new Section 31A concerning the liability of directors who are not whole-time directors of a specified insurance company.

Under this provision, a non-whole-time director can be held liable for an act or omission committed by the company if it occurred with the director’s knowledge through board processes and with their consent or connivance, or if the director failed to act diligently. The term board also includes committees of the board.