Introduction
The Insurance Regulatory and Development Authority of India (“IRDAI”) has notified the IRDAI (Registration of Indian Insurance Companies) Regulations, 2022 (“2022 Regulations”), on December 8, 2022. The 2022 Regulations consolidate various prescriptions relating to registration of Indian insurance companies and the transfer of shares of such entities. Previously, such prescriptions were dispersed across multiple regulations, circulars, and guidelines such as the IRDAI (Listed Indian Insurance Companies) Guidelines, 2016, and the IRDAI (Investment by PE Funds in Indian Insurance Companies) Guidelines, 2017 (“2017 PE Guidelines”).
With the introduction of the 2017 PE Guidelines, the IRDAI had attempted to make the sector more conducive for PE investments. The IRDAI had provided some much-needed clarity on investment in insurance companies by PE funds. Though the 2017 PE Guidelines had codified some practices that had already been developed and implemented by the IRDAI, it also brought in the new requirement of PE Funds having to invest through a Special Purpose Vehicle (“SPV”) in case of promoter stakes. The requirement of an SPV has been one of the most controversial provisions of the 2017 PE Guidelines. Various stakeholders have, over time, highlighted the tax implications and administrative burdens of the SPV requirement.
The 2022 Regulations now consolidate and address various aspects related to investments in insurance companies. Our analysis of these aspects, particularly from the PE funds’ perspective, indicates that these changes have been made to further ease of doing business in the insurance industry.
Expanding the Definition of PE Fund
The definition of a “PE Fund” under the 2017 Guidelines was an inclusive one, which included alternative investment funds registered with the Securities and Exchange Board of India (SEBI) or a fund specifically formed for investment in one or more entities by one or more persons and included domestic and foreign PE funds. Under the 2022 Regulations, the definition of “PE Fund” has been broadened to include investment funds registered with the International Financial Services Centres Authority (IFSCA), as well as all such funds that are specifically formed for investments, subject to the condition that such fund or their manager is registered with the appropriate financial sector regulator of their originating jurisdiction.[1]
Conditions for a PE Fund investing as a Promoter and omission of the Special Purpose Vehicle (SPV) requirement
To the relief of the industry, the 2022 Regulations removed the mandatory SPV requirement for a PE Fund to invest in an insurer in the capacity of a promoter. This implies that there is no longer any need for a PE Fund to invest in an insurer through an SPV, even if such investment is in the capacity of a promoter. This eliminates the tax and administrative burden on PE Funds, which wish to promote an insurance company. However, in the event the PE Fund (for structuring purposes or otherwise) desires to invest though an SPV, the same is still permitted, subject to compliance with Regulation 6(3) of the 2022 Regulations.
The 2022 Regulations provide a list of entities that can be an “Indian Promoter”[2], which include any other entity permitted by the IRDAI which meet the criteria of a ‘promoter’, as defined under the Companies Act, 2013. A “Foreign Promoter” has also been broadly defined to include any person that meets an illustrative criteria, which also resembles the criteria of a ‘promoter’ as defined under the Companies Act, 2013.[3] In light of this, a PE Fund can either be an “Indian Promoter” or a “Foreign Promoter” as long as it fulfils the conditions of a ‘promoter’[4]. However, for such an investment as a promoter, the PE Fund will need to fulfil the following criteria:
- The manager of the PE Fund or its parent fund has completed 10 years of operation;
- The funds raised by the PE Fund, including its group entity(ies), is USD 500 million or more (or its equivalent in INR);
- The investible funds available with the PE Fund is not less than USD 100 million; and
- The manager of the PE Fund has invested in the financial sector in India or other jurisdictions.
Such eligibility criteria derive its foundations from the 2017 PE Guidelines. These foundations, coupled with the regulatory experience, ensure that only serious investors are welcomed to the industry. Do note that in addition to these requirements, the PE Fund will, in any case, require to satisfy the fit and proper criteria set out under Regulation 6(2), read with Schedule I of the 2022 Regulations.[5]
Additionally, the IRDAI has also permitted NOFHC, registered with the Reserve Bank of India, or a company incorporated under the Companies Act, 2013, to be an ‘Indian Promoter’. This implies that a PE Fund has the flexibility to decide the structuring of its investment vis-à-vis whether to invest through an SPV (through the abovementioned entities) or whether to invest directly.
Promoter Holding
Under the 2017 PE Guidelines, an investment of over 10% in the paid up capital of an insurer necessarily had to be made as a ‘promoter”.[6] Under the 2022 Regulations, the promoter threshold has been raised from the erstwhile 10% of the paid up capital of an insurer to 25% of the insurer’s paid up capital and consequently, the investor threshold has increased from “up to 10%” of the insurer’s paid up capital to “up to 25%” of the insurer’s paid up capital.[7]
The 2022 Regulations have also overhauled the minimum promoter shareholding criteria. The minimum collective promoter holding was set at 50% of the paid-up share capital of an insurer, which can be further reduced to 26% in case of a listed insurer having a satisfactory solvency record for the preceding five years.[8] There is no requirement for an Indian or Foreign Promoter to hold any minimum shares individually. This paves the way for a diverse shareholding pattern among insurance companies.
Lock-in and other obligations
Given that the maximum permissible investment by an ‘investor’ has been increased to ‘up to 25%’, there are additional obligations that have been introduced on investors. The IRDAI has provided for a staggered lock-in requirement under the 2022 Regulations on shares of an insurance company. The primary lock-in applicable on all shareholders is five years from the date of grant of certificate of registration.
All investments made post the date of grant of certificate of registration (for example through a rights issue) do not impact the lock-in on the shares acquired earlier. Gradually, as the insurer ages, the lock-in period has been reduced to two years for a promoter and one year for an investor on their new investment. The lock-in provisions, except for the initial lock-in and investment during the initial lock-in, apply on issue of new shares, which result in change in shareholding pattern.
The lock-in provisions are as follows:
| Time of Investment (“X”) | Lock-in Period (Years) FOR Promoters | Lock-in Period (Years) FOR Investors |
| Investment at the time of or before grant of Certificate of Registration (“R3”) | 5 years from R3 | 5 years from R3 |
| Investment within 5 years of R3 | Earlier of the following: a) 5 years from X; or b) 8 years from R3 | Earlier of the following: a) 5 years from X; or b) 8 years from R3 |
| Investment after 5 years from R3 but before 10 years from R3 | Earlier of the following: a) 3 years from X; or b) 12 years from R3 | Earlier of the following: a) 2 years from X; or b) 11 years from R3 |
| Investment After 10 years from R3 | 2 years from X | 1 year from X |
Multiple Investments in Single Class of Insurance Business
By virtue of the 2022 Regulations, the IRDAI has permitted a person to hold stakes in multiple insurers undertaking the same class of insurance business. In this regard, the key points are below:
The 2022 Regulations provide that an investor holding 10-25% of equity capital can invest in two insurers of each class of insurance business and has the right to nominate director(s) on the Board of such insurers.[9]
FDI in Insurance Companies
The 2022 Regulations also consolidate various prescriptions in relation to Foreign Direct Investment (“FDI”) in insurance companies, particularly the manner of calculation of FDI in an insurance company, requirement of resident Indian citizenship for directors and key managerial personnel as well as requirement for foreign investors exceeding 49% of the insurer. There has been no change in the principles of substantive law and discussion on the same can be found in our blog post dated August 22, 2022 .
Key Changes in 2022 Regulations vis-à-vis the previous legal regime
| No. | Particulars | 2017 PE Guidelines | 2022 Regulations |
| 1. | Indian SPV Requirement | A PE Fund could invest in the capacity of a promoter of an insurer only through a SPV in India. | There is no requirement of a PE Fund investing in an insurer as a promoter through an Indian SPV. |
| 2. | Investment in the capacity of Investor | A PE Fund was permitted to hold only up to 9.99% of the insurer as an “investor”. | A PE Fund can hold up to 24.99% of the insurer as an “investor”. |
| 3. | Restriction on collective shareholding of investors | The 2017 PE Guidelines restricted all Indian investors (including PE Funds) from collectively holding more than 25% of the paid-up share capital of an insurer. Further, all investors collectively could not hold more than 50% of the paid-up share capital of an insurer. | There is no restriction on shares held by ‘Indian investors’ collectively. However, investors collectively cannot hold more than 50% in case of unlisted insurer and 74% in case of a listed insurer (having a satisfactory solvency record for preceding five years) due to minimum promoter holding requirement. |
| 4. | Maximum investments | Did not allow investments in excess of 10% in multiple insurers undertaking the same class of business. | A PE Fund can now invest in excess of 10% (but less than 25%) in up to two insurers of each category. |
| 5. | Lock-in | A lock-in on shares for a period of five years was applied on all shares in case of fresh investments. There was no lock-in on investors holding less than 10% of the capital of an insurer. | Every investors’ and promoters’ shares are subject to a lock-in. The lock-in has been introduced in a staggered manner where lock-in on old investments will not be impacted by fresh investments and the number of years of lock-in gradually decreases as the insurer ages. |
The Road Ahead
A master circular is likely to soon follow the 2022 Regulations. We expect this to cover the procedural aspects with respect to seeking registration as an insurer and transfer of shares by providing the various forms that were previously contained in the erstwhile regulations. We also expect the IRDAI to duly withdraw the 2017 PE Guidelines.
The IRDAI has brought in a slew of reforms, aimed at increasing ease of doing business through advanced supervisory clarity. Many previous practices of the IRDAI have now been codified and will be able to provide a bird’s eye view to an investor wishing to invest in Indian insurance companies. The rationalisation of various regulatory requirements will help bring in a higher flow of investments in the sector, thus equipping insurers with enough capital to achieve the ‘insurance for all’ mission by 2047.
[1] Regulation 2(l) of the 2022 Regulations.
[2] Regulation 2(h) of the 2022 Regulations.
[3] The criteria resembles the definition of ‘promoter’ under section 2(69) of the Companies Act, 2013.
[4] It is pertinent to note that the Exposure Draft of the 2022 Regulations provided that trusts were disqualified to be an ‘Indian Promoter’. Given that PE Funds are often organized as trusts and partnership firms, the IRDAI has accepted industry recommendations to omit such references from the final regulations.
[5] Schedule I contains an indicative criteria including financial strength, ability to access capital, approval by regulatory bodies outside India, convictions against the entity by statutory or judicial bodies in or outside India, agreement between shareholders and impact on control and management, source of funds and beneficial ownership of shares of investors or promoters.
[6] Paragraph 3(2) of 2017 PE Guidelines.
[7] Regulation 6(7) of the 2022 Regulations.
[8] Regulation 6(6) of the 2022 Regulations.
[9] Regulation 6(7)(iii) of the 2022 Regulations. This resolves issue whether an investor having a board seat should mandatorily be classified as a promoter or not.
