25 January, 2016
IRDAI Issues Regulations relating to Issuance of Capital by Indian Insurance Companies Transacting Life and Non-life Business
The Insurance Regulatory and Development Authority of India (‘IRDAI’) has issued:
i. The IRDAI (Issuance of Capital by Indian Insurance Companies Transacting Life Insurance Business) Regulations, 2015, in supersession of the IRDAI (Issuance of Capital by Life Insurance Companies) Regulations, 2011 (notified on December 17, 2015); and
ii. The IRDAI (Issuance of Capital by Indian Insurance Companies Transacting Other Than Life Insurance Business) Regulations, 2015, in supersession of the IRDAI (Is- suance of Capital by General Insurance Companies) Regulations, 2013 (notified on December 15, 2015). (collectively, the ‘Regulations’).
Some of the salient features of the Regulations are:
- No Indian insurance company transacting life, general, health insurance or re- insurance business may approach the Securities and Exchange Board of India (‘SEBI’) for public issue of shares / any subsequent issue under the SEBI (Issue of Capital Disclosure Requirements) Regulations, 2009, as amended from time to time (‘ICDR Regulations’), without the prior approval of IRDAI;
- The definition of the term ‘Promoter’ now refers to the definition as per Section 2(69) of the Companies Act and includes ‘Indian Promoter’ as defined in the IRDAI (Registration of Indian Insurance Companies) Regulations, 2000. For purposes of the offer document, the definition of ‘promoter’ under the ICDR Regulations is also applicable.
- These Regulations apply to: (a) divestment of equity by one or more promoters/ investors through a public offer for sale; (b) issuance of capital under the ICDR Regulations; or (c) a combination of (a) and (b). Any other form of capital issu- ance, including any transfer of shares beyond the limits set out in the Insurance Act, 1938 (the ‘Insurance Act’), will require specific prior approval of the IRDAI and will be governed by the IRDAI (Transfer of Equity Shares of Insurance Compa- nies) Regulations, 2015;
- A company proposing to raise share capital through a public issue in terms of the Regulations may do so at any time from date of issuance of the certificate of regis- tration;
- The IRDAI is entitled to prescribe certain conditions including the extent to which promoters and investors are required to dilute their shareholding, maximum sub- scription to be allotted to foreign investors, minimum lock-in period for promot- ers and investors, and modification to charter documents to explicitly provide that no transfer of shares that may be undertaken beyond the limit specified in Section 6A of the Insurance Act is to be registered without prior approval of the IRDAI;
- The IRDAI approval will be valid for a period of one year from the date of the approval letter, and the applicant company is required to file the draft red her- ring prospectus with SEBI under the ICDR Regulations within such period, subject to compliance with the Regulations. This period can be extended by a further six months at IRDAI’s discretion;
- The IRDAI may direct an Indian insurance company transacting life, general, health insurance or reinsurance business to get listed on a stock exchange, if cir- cumstances so warrant, within the timelines specified under the Regulations.
IRDAI Issues Guidelines on Indian Ownership and Control of Indian Insurance Companies
The Insurance Laws (Amendment) Act, 2015, effective on December 24, 2015, which permits FDI in the insurance sector up to 49% of the paid up equity share capital of an insurance com- pany, also requires that insurance companies be ‘Indian owned and controlled’.
IRDAI has prescribed guidelines dated October 19, 2015 on ‘Indian owned and controlled’ (‘O&C Guidelines’), some of the provisions of which have subsequently been interpreted by IR- DAI while dealing with applications made before it by insurance companies. The salient features of the O&C Guidelines are as follows:
i. Applicability: The O&C Guidelines are applicable to (a) Indian insurance compa- nies that (x) come into existence after notification of the Insurance Laws (Amend- ment) Act, 2015; (y) propose to hike FDI from the existing level; and (z) do not intend to increase foreign stake from existing level; and (b) insurance intermedi- aries as defined in the Insurance Regulatory and Development Authority Act, 1999 such as brokers, third party administrators, surveyors and loss assessors, but do not apply to an insurance intermediary generating more than 50% of its revenue from non-insurance activities.
ii. Timelines: Existing Indian insurance companies were required to comply with the O&C Guidelines within a period of three months from October 19, 2015, which time-period may be extended by IRDAI on a case to case basis, for further three months, provided that the total time does not extend beyond six months from Oc- tober 19, 2015.
iii. Key Indian Control Requirements:
- Board composition: A majority of directors (excluding independents) on the board of directors of an Indian insurance company (‘Board’) are required to be nominated by the Indian promoter / Indian investor;
- Key management persons: Key management persons of an Indian insurance company including the chief executive officer, managing director, and principal officer are to be appointed through the Board or by the Indian promoter / Indi- an investor. However, key management person(s) excluding the chief executive officer may be nominated by the foreign investor, if such appointment is sub- sequently approved by the Board , wherein a majority of directors (excluding independents) are nominees of the Indian promoter / Indian investor(s);
- Chairman: The Chairman of the Board of an Indian insurance company is to be nominated by the Indian promoter / Indian investor, where such chairman has a casting vote;
- Quorum: Presence of majority of an Indian insurance company’s Indian direc- tors, irrespective of whether a foreign investor’s nominee is present or not, is required for a valid quorum at a Board meeting. The presence of a nominee director of the foreign investor has been recognized as a protective right, not amounting to ‘control’. The provisions of the Companies Act will apply in case of an adjournment. Based on our recent experience with IRDAI, we note that it has permitted clauses in joint venture / shareholders agreements that stipulate the presence of at least one nominee, each of the foreign investor and the Indian promoter / Indian investor, at the commencement of and throughout a Board meeting to constitute a valid quorum, provided that the number of nominees of the Indian promoter / Indian investor present at the beginning of and through- out such Board meeting is greater than the number of foreign investor nominees.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
