FDI Liberalisation in Insurance Companies and Harmonisation of Insurance Regulations What Has Changed in the Year Gone By

The Union Budget 2021-22 announced the proposal to liberalise Foreign Direct Investment (“FDI”) in Indian insurance companies from the existing 49% to 74% with effect from August 2021. The aforesaid proposal was subsequently formalised by way of introduction of the Insurance (Amendment) Act, 2021 (“Amendment Act”), to amend the Insurance Act, 1938. Please click here to refer to our earlier blog for more details in this regard.

Pursuant to the Amendment Act, the Insurance Regulatory and Development Authority of India (“IRDAI”) notified the IRDAI (Indian Insurance Companies) (Amendment) Regulations, 2021, on July 7, 2021, to harmonise the provisions of various regulations applicable to insurance companies with the Amendment Act, read with the Indian Insurance Companies (Foreign Investment) Rules, 2015.

The following regulations and rules were therefore amended:

(i) Indian Insurance Companies (Foreign Investment) Rules, 2015;

(ii) Insurance Regulatory and Development Authority (Registration of Indian Insurance Companies) Regulations, 2000;

(iii) Insurance Regulatory and Development Authority of India (Transfer of Equity Shares of Insurance Companies) Regulations, 2015;

(iv) Insurance Regulatory and Development Authority of India (Issuance of Capital by Indian Insurance Companies Transacting Life Insurance Business) Regulations, 2015;

(v) Insurance Regulatory and Development Authority of India (Issuance of Capital by Indian Insurance Companies Transacting other than Life Insurance Business) Regulations, 2015.

As per the amended Indian Insurance Companies (Foreign Investment) Rules, 2015, in an Indian insurance company having foreign investment:

(a) a majority of directors;

(b) a majority of its key managerial personnel; and

(c) atleast one among the chairperson of its board, its managing director, and its chief executive officer,

shall be resident Indian citizens. Indian insurance companies had to comply with the above requirement within one year from the date of coming into force of the said provision.

In addition to the above, Indian insurance companies, with foreign investment exceeding 49%, had to comply with the following:

(i) for a financial year for which dividend is paid on equity shares and for which at any time the solvency margin is less than 1.2 times the control level of solvency, not less than 50% of the net profit for the financial year shall be retained in general reserve; and

(ii) not less than 50% of its directors shall be independent directors, unless the chairperson of its board is an independent director, in which case at least 1/3rd of its board shall comprise of independent directors.

Given that pursuant to the above amendments, foreign ownership in Indian insurance companies was allowed to exceed 49%, the application of the Guidelines on “Indian owned and controlled”, dated October 19, 2015, issued by the IRDAI (“IOCC Guidelines”), to Indian insurance companies, was withdrawn by the IRDAI vide circular dated July 30, 2021, with effect from such date. The IOCC Guidelines had laid down certain restrictions in terms of governance of Indian insurance companies. It had inter alia prescribed that (i) direct/ indirect foreign investment in Indian insurance companies should not exceed 49%; (ii) control over the significant policies of such Indian insurance companies must always vest with the Indian investors/ promoters; (iii) majority of directors (excluding independent directors) and the Chief Executive Officer/ Managing Director should be nominated by Indian investors/ promoters. However, these requirements were withdrawn by the IRDAI.

Accordingly, foreign investors have been permitted to exercise control over the operations and significant policies of Indian insurance companies. As mentioned above, the effect of the IOCC Guidelines was such that significant matters were within the control of the board of directors (majority of which comprised of directors nominated by Indian investors/ promoters). This resulted in the IRDAI resisting a structure which comprised of certain veto rights that took away effective control from the board of directors. In light of IRDAI’s strict approach, foreign investors could not exercise veto rights, which discouraged further investments. However, withdrawal of the IOCC Guidelines, technically, allowed foreign investors to re-instate their veto rights as shareholders. This, therefore, has resulted in re-negotiations of existing shareholder arrangements by foreign investors with Indian promoters and has provided impetus to new foreign investors to enter the Indian insurance market with greater flexibility, thereby leading to increase in FDI in India. The key regulatory conditions to be complied with on a going forward basis are the residency requirements for directors/ key managerial personnel and the requirement to appoint additional independent directors (as discussed above).

Pursuant to the above amendment, the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, was also amended vide a notification dated August 19, 2021, to reflect the increase in FDI limit up to 74% in insurance companies. This was one of the most critical aspects of the regulatory changes being implemented to give effect to the increased FDI limit of 74%, which enabled foreign investors to actually invest in and increase their stake up to 74% in Indian insurance companies.[1]

While some of the regulations have been amended pursuant to the amendments made vide the Amendment Act and the IRDAI (Indian Insurance Companies) (Amendment) Regulations, 2021, the possibility of further regulatory amendments to align other regulations notified by the IRDAI, with the abovementioned policy changes, in the future, cannot be disregarded.

Since foreign investors can (pursuant to the amendment in the NDI Rules) invest up to 74% in Indian insurance companies, it is worthwhile to note the already existing provisions with respect to computation of foreign shareholding in Indian insurance companies. As per the IRDA (Registration of Companies) Regulations, 2000 (“Registration Regulations”), the calculation of equity shareholding by one or more foreign investors in the Indian insurance company shall be the aggregate of the following:

(i) the quantum of paid-up equity share capital held by foreign investors, including foreign venture capital investors, in the Indian insurance company; and

(ii) the proportion of paid-up equity share capital held or controlled by such foreign investors either by itself or through its subsidiary companies in the Indian promoter/ Indian investor as mentioned in (i) above.

It therefore appears that for the purpose of computing the cap of 74%, direct as well as indirect shareholding of foreign investors in an Indian insurance company (directly)/Indian investor or promoter (indirectly) is taken into consideration. The ambiguity however lies in whether indirect shareholding of a foreign investor should be taken into consideration for the purpose of the cap, only if such indirect foreign investor has also directly made investments in the Indian insurance company. This aspect is not quite clear from the regulations itself. Moreover, to include direct and indirect foreign investments in Indian insurance companies from the same foreign investor does not appear to be in alignment with the spirit of the intentions of the IRDAI. In light of the above, further investments in Indian insurance companies should be made pursuant to a thorough analysis of the already existing foreign investments (direct and indirect) in such Indian insurance companies, more so, if the holding company of the relevant Indian insurance company is foreign owned and controlled.

The amendment to the Registration Regulations has also introduced the requirement for an insurance company with foreign investment that is seeking registration to have either the managing director, chief executive officer or the whole-time director, along with the promoter of the company, to submit an affidavit to the IRDAI, certifying compliance with the residency and citizenship qualification, in addition to the application for a grant of registration certificate. A similar affidavit is also needed to certify compliance with the requirement to retain profits and having not less than fifty per cent of its directors as independent directors, unless the chairperson of its board is an independent director, if the foreign investment of the company seeking registration is more than 49%. The amendment has also introduced a requirement for existing insurers to submit an undertaking, along with relevant attachments, confirming their compliance with the residency and citizenship qualification, signed by the chief executive officer and chief compliance officer. This undertaking is required to be submitted to the IRDAI within 45 days of the board meeting on which such compliance is confirmed.

In addition to the above, we would like to specify that in case of insurance brokers, pursuant to liberalisation of FDI up to 100% and withdrawal of the IOCC Guidelines being made applicable to them, a new regulation 21A was introduced in the IRDAI (Insurance Brokers) Regulations, 2018, to provide that every insurance broker, with majority foreign shareholding, will be required to furnish an undertaking in the prescribed form to the IRDAI. By way of such undertaking, insurance brokers are required to confirm that they will procure prior IRDAI permission for repatriating dividend, bringing in latest technological, managerial and other skills, majority of directors on the board shall be resident Indian citizens, etc. Please click here for more information in relation to liberalisation of FDI in the insurance broking sector. In any case, please note that no such similar provisions have been introduced for Indian insurance companies. However, we will need to wait and watch for any further similar regulatory restrictions that the IRDAI may impose on Indian insurance companies.

In addition to the above amendments, the IRDAI has issued a circular dated May 18, 2020, to inter alia provide that in light of issuance of Press Note No. 3 (2020 Series)[2] by the Government of India, insurance intermediaries shall be required to provide an undertaking duly signed by the Principal Officer and Compliance Officer, as applicable, confirming compliance with the Press Note No. 3 (2020 Series), along with (a) a certified true copy of the board resolution of the insurance intermediary, confirming compliance with Press Note No. 3 (2020 Series); and (b) approval of the Government of India with respect to compliance with Press Note No. 3 (2020 Series), wherever applicable.

This increases due diligence checks with respect to non-resident investors that are required to be undertaken by an insurance intermediary to ensure that the requirements of Press Note No. 3 (2020 Series) are complied with. While the insurance intermediary is required to provide an undertaking to the IRDAI in this regard, it may also have to procure a similar back-to-back undertaking from the non-resident investor. A similar requirement is not there in relation to insurance companies. However, amendments have also been made under Indian corporate laws to introduce additional reporting requirements in relation to Press Note No. 3.

Also, post the increase in the FDI limit to 74%, we have come across instances of greenfield investments wherein the IRDAI has emphasised on naming the foreign entity (holding more than 49% in the Indian insurance company) as a ‘foreign promoter’, along with naming an Indian entity having significant board rights and a shareholding of 10% or more in the insurance company, as an ‘Indian promoter’. This is in addition to subjecting the Indian promoter and the foreign promoter to a lock-in period.

Conclusion

In February 2021, when the government announced the move to increase the FDI to 74%, there were concerns regarding the extent to which the Indian government may press the requirement that the ‘control’ of Indian insurance companies remain in the hands of Indian residents. However, except certain residency requirements for directors and key managerial personnel and the requirement to appoint additional independent directors (as discussed above), no further conditions are likely to be imposed.

Rise in the FDI cap in Indian insurance companies and the changing legal landscape recognises the need for FDI in the insurance sector and the demand for capital, better knowhow and global best practices. Thereby, this change in the FDI limit has renewed investment activities in the last one and a half years and triggered multiple transactions involving increased FDI in Indian insurance companies. Considering that foreign investors now have the ability to negotiate a ‘re-set’ of their arrangements with Indian promoters, we anticipate a surge in FDI in the insurance sector in the coming years.


[1] Para 13 of Form A of the IRDAI (Issuance of Capital by Indian Insurance Companies Transacting Life Insurance Business) Regulations, 2015 (“Issuance of Capital LI Regulations”) and IRDAI (Issuance of Capital by Indian Insurance Companies Transacting other than Life Insurance Business) Regulations, 2015 (“Issuance of Capital NLI Regulations”), previously required insurers seeking approval of the IRDAI for issue of capital under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“SEBI ICDR”) (i.e. public issue)/ offer for sale, to confirm compliance with “Indian ownership and control” requirements including post issuance of capital in accordance with the application made by the insurers. Pursuant to the amendment to para 13 of the Issuance of Capital LI Regulations and Issuance of Capital NLI Regulations, the insurer seeking IRDAI approval for issuance of capital under SEBI ICDR, is required to inter alia confirm that it is compliant with the requirements of (the updated) Section 2(7A)(b) of the Insurance Act, 1938 read with Indian Insurance Companies (Foreign Investment) Rules, 2015 (as amended by the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2021) and regulations and any guideline issued by the IRDAI. Considering the above, it appears that there is a slight indication by the IRDAI about issuance of further guidelines in the future.

[2] The Department for Promotion of Industry and Internal Trade issued a Press Note No. 3 (2020 Series) to state that a non-resident entity of a country which shares land borders with India or where the beneficial owners of an investment into India are situated in or are citizens of any such country, can invest in India only after procuring the prior approval of the Government of India.

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Photo of Indranath Bishnu Indranath Bishnu

Partner in the general corporate practice at the Mumbai office of Cyril Amarchand Mangaldas. Indranath advises on foreign direct investments, mergers and acquisitions and joint ventures and specializes in the Insurance industry. He has advised multiple corporations, both Indian and foreign, in relation…

Partner in the general corporate practice at the Mumbai office of Cyril Amarchand Mangaldas. Indranath advises on foreign direct investments, mergers and acquisitions and joint ventures and specializes in the Insurance industry. He has advised multiple corporations, both Indian and foreign, in relation to the establishment, operation, management and control of insurance companies in India. Pursuant to the amendments of the Insurance Act as well as the Foreign Investment Policy relating to the insurance sector in 2015, Indranath has been involved in multiple deals involving the entry, exit and increase of ownership of stakeholders in the said sector.

He also advises on mergers and acquisitions in other financial services sectors such as mutual funds, credit information companies, commercial banks, credit card companies, and payment and settlement systems. Other sectors that he has advised in include civil aviation, retail, consumer goods and services, and real estate. He can be reached at indranath.bishnu@cyrilshroff.com

Photo of Niyati Dholakia Niyati Dholakia

Senior Associate in the General Corporate practice in the Mumbai office of Cyril Amarchand Mangaldas. Niyati advises on mergers and acquisitions and foreign direct investment, with a focus in the insurance space. She is also involved in advising both Indian and foreign institutions…

Senior Associate in the General Corporate practice in the Mumbai office of Cyril Amarchand Mangaldas. Niyati advises on mergers and acquisitions and foreign direct investment, with a focus in the insurance space. She is also involved in advising both Indian and foreign institutions in relation to the restructuring, amalgamation, demergers, business transfers and joint ventures. She can be reached at Niyati.dholakia@cyrilshroff.com

Photo of Ayushi Agrawal Ayushi Agrawal

Associate in General Corporate practice in the Mumbai office of Cyril Amarchand Mangaldas. Ayushi is involved in advising private and public companies, key Indian financial institutions (including banks) on mergers & acquisitions, business alliance, restructuring, and foreign investments in India, with a special…

Associate in General Corporate practice in the Mumbai office of Cyril Amarchand Mangaldas. Ayushi is involved in advising private and public companies, key Indian financial institutions (including banks) on mergers & acquisitions, business alliance, restructuring, and foreign investments in India, with a special focus on the insurance sector. She can be reached at ayushi.agrawal@cyrilshroff.com