Introduction

Four months after the Insurance Regulatory and Development Authority of India (“IRDAI”) notified 2022 Regulations that streamline registration and share transfer requirements of Indian insurance companies, the IRDAI has issued a master circular titled ‘Master Circular on Registration of Indian Insurance Company, 2023’ dated April 24, 2023 (“Master Circular”) to supplement the procedural aspects of 2022 Regulations.

The Master Circular outlines the operational, procedural and transitional requirements for seeking registration as an insurer and transfer of its shares by bringing in various erstwhile regulatory forms under a common shed.. Previously, prescriptions such as the IRDAI (Listed Indian Insurance Companies) Guidelines, 2016 (“Listed Guidelines”), and the IRDAI (Investment by PE Funds in Indian Insurance Companies) Guidelines, 2017 (“2017 PE Guidelines”), etc., were dispersed across multiple regulations, circulars, and guidelines. Vide the Master Circular, the IRDAI has repealed the Listed Guidelines, 2017 PE Guidelines, as well as the Circulars titled ‘Transfer of Shares of the Insurance Companies’ dated July 22, 2020 and ‘Details of Equity Holding Pattern of Insurance Companies’ dated September 27, 2018.

Lock-in and other obligations

The IRDAI had introduced a staggered lock-in requirement under the 2022 Regulations on shares of an insurance company for both categories of shareholders, viz. ‘promoters’ and ‘investors’. The lock-in periods under the 2022 Regulations are rationalised in comparison to the erstwhile regime for the promoters of insurers. Accordingly, it was questioned if the lock-in provisions under the 2022 Regulations would apply for investments made before the issuance of 2022 Regulations.

The Master Circular clarifies that 2022 Regulations would modify the lock-in periods imposed on promoter shares while granting approval under the erstwhile regime. For instance, a primary investment by a PE Fund amounting to 40% of the paid-up share capital of an insurer made on January 1, 2022 would have been locked in for a period of five years, i.e. until  January 1, 2027. As per the clarifications issued under the Master Circular, upon the 2022 Regulations coming into force, assuming the relevant insurer is aged more than ten years, the lock-in shall be of only two years, i.e. till January 1, 2024.

The Master Circular further clarifies that the lock-in periods shall not apply on shares acquired in the capacity of ‘investor’ until the date of notification of 2022 Regulations. Considering that there was no lock-in on ‘investors’ under the previous regime, the IRDAI has taken a liberalised view of not imposing any lock-in on shares acquired by ‘investors’ retrospectively.

No lock-in on listed companies

The 2022 Regulations proposed lock-in on investments made in the insurer leading to change in shareholding pattern. It was unclear how the lock-in would apply to listed insurers, specifically if investors in  listed insurers would also be subjected to lock-in requirements. Since the 2022 Regulations also introduced lock-in on ‘investors’, which would include small/ retail shareholders, one was forced to take a view that any share allotted  to a shareholder with a minor stake in an insurer (whether listed or unlisted) shall also be locked-in.[1]

Vide the Master Circular, it has been clarified that the lock-in provisions under Regulation 6(1) of the 2022 Regulations would not apply at all to listed insurance companies. However, for insurers intending to get their shares listed on stock exchanges would be eligible for lock-ins for the period preceding the date of listing, unless specific approval of the IRDAI is obtained under the proviso to Regulation 6(1) of the 2022 Regulations. Therefore, an insurer seeking approval of the IRDAI for listing its shares may also simultaneously apply for an exemption under Regulation 6(1) of the 2022 Regulations.

Application for reclassification of ‘promoters’

The 2022 Regulations now permit shareholders to hold up to 25% of the paid-up capital of an insurer without being classified as a ‘promoter’. However, given that all shareholders holding more than 10% of the paid-up share capital of an insurer were classified as ‘promoters’ under the erstwhile regime, various shareholders currently holding 10-25% of an insurer’s paid-up capital are still classified as ‘promoters’. The reclassification of such shareholders from ‘promoters’ to ‘investors’ shall not be automatic and is subject to the approval of the IRDAI.[2] Once the IRDAI approves reclassification of a ‘promoter’ as an ‘investor’, the applicable lock-in is likely to stand modified to such lock-in as applicable to ‘investors’ under the 2022 Regulations.

Right to appoint nominee director clarified

The 2022 Regulations provided that an investor holding 10-25% of an insurer’s share capital may appoint a nominee director on the board of an insurer. However, the 2022 Regulations has stayed silent on the ability of an investor holding up to 10% of the share capital of an insurer to appoint a nominee director on the insurer’s board. The Master Circular specifically clarifies that-

1. Investors holding up to 10% of the insurer’s share capital cannot appoint a nominee director; and
2. All existing nominee directors of investors holding up to 10% of the share capital should vacate the office within six months of the date of issuance of the Master Circular.

The Road Ahead

The IRDAI has, among other things, focused on developing a principle-based regulatory regime while rationalising various prescriptions and forms. At the same time, AML-KYC related checks in transfer-related forms have expanded to group level, ushering in a new standard of propriety assessment. The 2022 Regulations and the Master Circular codify previous practices of the IRDAI and now provide in-depth visibility of the regulatory landscape.

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[1] Risk Factor 5 of the Draft Red Herring Prospectus of Go Digit General Insurance Company Limited on page number Company Limited on page number 54.

[2] Section VII Part 1(C) of the Master Circular.