30 January, 2018
On December 5, 2017, the Insurance Regulatory and Development Authority of India (‘IRDAI’) issued the IRDAI (Investment by Private Equity Funds in Indian Insurance Companies) Guidelines, 2017 (‘PE Guidelines’). While the IRDAI has previously permitted private equity funds to acquire minority interests in insurance companies as ‘investors’, the IRDAI has now sought to regulate, inter alia, the manner in which ‘promoter’ interests can be acquired by private equity funds. Some of the salient features of the PE Guidelines are set out below:
i. The PE Guidelines apply to unlisted Indian insurance companies and private equity funds (including alternative investment funds) (‘PE Fund’) intending to acquire stake in such insurance companies, either as an ‘investor’ or a ‘promoter’.
ii. Key conditions for investment by a PE Fund as an ‘investor’ are: a. Shareholding of the PE Fund cannot exceed 10% of an insurer’s paid up capital and the combined shareholding of all Indian investors (including Indian PE Funds) should not exceed 25% of the insurer’s paid up capital;
b. Investment can be made directly or through a special purpose vehicle, being a company or an LLP incorporated in India (‘SPV’);
c. Minimum shareholding of the promoter / promoter group is to be maintained at 50% of the insurer’s paid up capital, unless a lower shareholding has been previously approved;
d. Investment has to be as per PE Fund’s strategy, as reflected in its placement memorandum;
e. PE Fund has to furnish an undertaking to not create any encumbrance on, or leverage, the investment; and
f. If investment is one-time, upfront disclosure by the PE Fund is to be made to this effect.
iii. Key conditions for investment by PE Fund as ‘promoter’ are:
a. Direct investment is not permitted and investment has to be effected through an SPV entirely out of its own funds, without using borrowed funds, per the strategy reflected in its placement memorandum;
b. PE Fund’s investment memorandum or charter documents of the SPV must permit investment up to the proposed investment level, including future capital requirements of the insurer
c. PE Fund cannot be a promoter of more than one life insurer, one general insurer, one health insurer and one reinsurer at the same time;
d. Minimum shareholding of the promoter / promoter group is to be maintained at 50% of the insurer’s paid up capital, unless a lower shareholding has been previously approved;
e. Lock-in of five years is applicable to not only PE Fund’s investment, but also to shareholders holding 10% or more of the SPV;
f. Induction of new shareholder in SPV by issue of new shares above 25% requires prior IRDAI approval;
g. One-third of the board of the insurer is to comprise of independent directors;
h. Chairman of the board of the insurer is to be an independent director, failing which the chief executive officer/managing director/whole-time director must be a professional (and not a promoter nominee);
i. PE Fund is to provide undertakings regarding: (i) no encumbrance / leveraging of the investment; (ii) subscription to rights issue of insurer such that it is not “cash strapped”; and (iii) divestment plan post-lock in period, preferably
through an initial public offer, to be submitted up-front; and
j. Insurer is to comply with guidelines on “Indian Owned and Controlled” and Indian Insurance Companies (Foreign Investment) Rules, 2015.
iv. In addition, the PE Guidelines also require PE Funds to comply with ‘fit and proper’ criteria for both, investments made as ‘investor’ and as ‘promoter’. A list of illustrative criteria and a detailed format of the declaration to be provided has been set out in the PE Guidelines. The criteria applicable for investments as a ‘promoter’ is more stringent than the criteria applicable for investments as an ‘investor’, and requires, inter alia, demonstration of the following:
(a) extent to which corporate structure of applicant is in consonance with effective supervision and regulation of the insurer;
(b) acquisition is in public interest and to secure proper management of insurer;
(c) desirability of diversified ownership of insurer;
(d) sources and stability of funds, business record and experience of applicant, etc ; and
(e) shareholder agreements and their impact on control and management of insurer and nature of acquisition.
v. The chairperson of IRDAI has the power to interpret the PE Guidelines.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
