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IRDAI Regulatory Reform Series: Registration and Capital Structure of Indian Insurance Companies

Background

The Insurance Regulatory and Development Authority of India (“IRDAI”) has a statutory duty to regulate, promote and ensure orderly growth of the insurance business and reinsurance business in India. Based on the IRDAI’s initiative to promulgate consolidated and principle-based regulations to govern the insurance industry, the Life Insurance Council and General Insurance Council (representative bodies of life and general insurers, respectively) constituted the Regulation Review Committee (“RRC”) to review the entire insurance regulatory framework and recommend principle-based regulations.

The RRC worked with several stakeholders and submitted its report to the IRDAI in 2023, inter alia recommending a principle-based framework for registration and regulation of Indian insurance companies. The objectives included inter alia developing simplified, principle-based, rationalised regulatory regime to enable ease of doing business and removing redundancies and duplications in the existing regulations. The RRC recommended consolidating the erstwhile 72 regulations into nine.

Basis the RRC report, the IRDAI notified the IRDAI (Registration, Capital Structure, Transfer of Shares and Amalgamation of Insurers) Regulations, 2024 (“Registration and Capital Regulations”), consolidating and repealing eight regulations[1]. The IRDAI notified the Master Circular on Registration, Capital Structure, Transfer of Shares and Amalgamation of Insurers, 2024, on May 15, 2024. Except for the aspects relating to the listing of Indian insurers on stock exchanges (more on this to follow separately), this blog analyses all key changes from the erstwhile regime relating to registration, capital and transfer of shares of an Indian insurance company. Codified in December 2022, the IRDAI notified the IRDAI (Registration of Indian Insurance Companies) Regulations, 2022 (“2022 Regulations”), consolidating various aspects related to registration of an insurance company, clarification of promoter eligibility, lock-in, etc.

Key Changes in Registration and Capital Regulations vis-à-vis the 2022 Regulations   

The 2022 Regulations itself, to begin with, were principle-based and consolidated various IRDAI regulations, circulars, guidelines and directives. Read our analysis on it here. Therefore, there was limited scope to amend the 2022 Regulations. Nonetheless, the Registration and Capital Regulations have brought forth the following key changes:

Introduction of de minimis exemption on applicability of lock-in

The 2022 Regulations specified a lock-in on every share issued by an insurer, which resulted in a change in shareholding pattern of the insurer. The regulatory intent behind such a move may be to ensure that the “fit and proper” IRDAI-approved promoters remain responsible for capital requirements of the insurer, especially in its infancy.

However, a blanket lock-in condition applicable to every shareholder of the insurer was cumbersome and excessive, especially for employees who exercised their stock options and held minimal shareholding in the insurer. Under the 2022 Regulations, there was no de minimis exemption provided from the lock-in related conditions for minor shareholders or employee shareholders. Further, it is pertinent to note that in accordance with Rule 12(6)(a) of the Companies (Share Capital and Debentures) Rules, 2014[2], the employee shareholders are subjected to a minimum vesting period of one year between the grant of options and vesting of options.

Regulation 8 of the Registration and Capital Regulations provides that employee shareholders and shareholders holding less than one percent of equity shares of the insurer shall not be subject to regulatory lock-in. In exempting the employee shareholders from lock-in, the regulatory intent may have been to avoid subjecting employees to two waiting periods (one under Rule 12(6)(a) of the Companies (Share Capital and Debentures) Rules, 2014, and the other under the Registration and Capital Regulations).

IRDAI’s power to relax lock-in expanded

Under the 2022 Regulations, in terms of the proviso to Regulation 6(1), the IRDAI had limited powers to relax lock-in, only to enable an insurer to list its shares on a stock exchange in India. Under the Registration and Capital Regulations, the IRDAI’s power to relax lock-in has now been expanded to two new areas: one, in case of distressed financial position and two, in case of amalgamation or reorganisation, pursuant to change in applicable law of any insurer or its shareholders. Given that promoters have not been explicitly carved out, in our understanding, the lock-in relaxation owing to ‘distressed financial position’ includes such situations for both insurers and promoters of insurers.

We believe that the second exemption will benefit promoters of insurers who are RBI regulated entities since RBI continues to insist on a Non-operating Financial Holding Company (“NOFHC”) structure under its Guidelines for “on tap” Licensing of Universal Banks in the Private Sector, dated August 1, 2016.[3] While the 2022 Regulations recognised NOFHC as an eligible “Indian promoter”, the Registration and Capital Regulations enable a smooth transition to this structure without attracting lock-in in the hands of the NOFHC entity. While the mandatory requirement for private equity funds to only invest through an Indian Special Purpose Vehicle (“SPV”) for a promoter stake in an insurer was removed under the 2022 Regulations, such power to relax lock-in on account of change in applicable law will help private equity promoters fold-up their SPV structures.

Lock-in for investors in matured insurers relaxed

Apart from the rationalised lock-in prescription under the 2022 Regulations, the IRDAI has further relaxed lock-in on investments after 15 years from the date of certificate of registration of the insurer. Investments by promoters of such insurers are subject to a lock-in of one year. All investments by investors in such insurers are not subject to a lock-in. As per data available in the public domain, 38 out of 60 IRDAI-registered insurers are aged 15 years or more. The investors, existing and potential, will stand to benefit from the removal of lock-in. Such a relaxation will also benefit investors who may have otherwise been averse to the sector, owing to the regulatory lock-in requirements.

Enhancement of governance requirements by avoiding potential conflict of interest

Although the IRDAI (Corporate Governance for Insurers) Regulations, 2024, is the primary source of regulations governing the corporate governance requirements of an insurer, there are a few additional requirements under the Registration and Capital Regulations as well. In addition to the requirements under the 2022 Regulations, the Registration and Capital Regulations now bar any shareholder from having nominee directors on the Boards of more than one insurer engaged in the same class of business. In terms of paragraph I.1 of Chapter II of the 2024 Master Circular, insurers are required to comply with such requirements before March 31, 2025. Accordingly, nominee directors already appointed on the Boards of multiple insurers in the same line of business, will have to step down from the Boards of such insurers, all but one, in a time-bound manner. This will go a long way in avoiding potential conflicts of interests.

Under the 2022 Regulations, there was a requirement to disclose common holdings to all investee insurers in case an investor held shares in multiple insurers. Such a compliance requirement was impractical for listed insurers, whose shares are traded on the bourses by retail investors. By applying a de minimis exemption to shareholders holding less than one percent shares in the insurer, the Registration and Capital Regulations have resolved this anomaly.

Empowering Competent Authority for various approvals

The Registration and Capital Regulations, at various places, introduce the concept of a “Competent Authority” to mean either the chairperson, or a whole-time member, committee of whole-time members or an officer of the IRDAI as may be determined by the chairperson. The Registration and Capital Regulations empower the Competent Authority for the purposes of various approvals and decisions. For example, an application to relax the lock-in on shares of an insurer can be processed by the Competent Authority. Upon assignment of Competent Authority for various matters enlisted under the Registration and Capital Regulations, processing of applications may become more efficient and streamlined. Earlier, the IRDAI had to utilise its powers of delegation under the IRDA Act, 1999, to delegate various matters for operational expediency.[4]

Share issuance at face value during registration process

The Registration and Capital Regulations provide that all equity shares issued by an applicant till the grant of certificate of commencement of business must be at face value with no securities premium. However, upon hitting the milestone of commencing business, any further funding rounds may involve a securities premium. Under the erstwhile regime, though it was not specifically codified, it was developed as a practice. Such a practice helps achieve price neutrality till commencement of business and avoid differential pricing for different shareholders (for example, a co-promoter, who is not a distribution partner, being charged a premium).

Codification of withdrawal of registration application

Due to various reasons, applicants may wish to withdraw their application seeking registration with the IRDAI as an insurer. Under the erstwhile regime, there was no procedure to withdraw such an application. As such, applicants could withdraw their applications if they believed that their application could be rejected. By doing so, applicants would avoid the consequences of an application rejection, including inter alia being ineligible to reapply for registration for a certain time period and triggering disclosure requirements to other regulators that such application has been rejected by the IRDAI.

Thus, to plug this gap, the Registration and Capital Regulations codified the withdrawal of application for registration as an insurer. Under Regulation 6(7) of the Registration and Capital Regulations, applicants are now required to apply to the IRDAI for withdrawal, citing reasons. If the IRDAI rejects such a withdrawal application, the registration application may still be decided on merit. If the IRDAI then rejects the registration application, all the consequences of ‘rejection of application’ shall be applicable. Codification of withdrawal process may help in sending a strong message to stakeholders regarding the seriousness of the application process. We anticipate that it will help filter non-serious applicants from applying and at the same time, allow the IRDAI to accept withdrawal of application on a case-to-case basis, if done for genuine reasons.

Conclusion

2022 Regulations marked an important milestone in IRDAI’s regulatory regime, governing insurers. Registration and Capital Regulations have been developed basis industry representation and feedback submitted by the RRC, after engaging with various stakeholders and advisors. They factor in certain practical difficulties in enforcing the 2022 Regulations and represent a fine-tuned version of it, with various relaxations to regulated entities while incorporating the regulatory experience of the past two years. While accepting industry suggestions, the IRDAI has also introduced aspects coming out of its own experience with the 2022 Regulations. With an amendment bill in the works for the Insurance Act, 1938, we may see more sweeping changes. Having said that, the core focus of the IRDAI remains towards developing the insurance market, to increase insurance penetration and ‘insurance for all by 2047’.


[1] i.           The 2022 Regulations;

ii.            Insurance Regulatory and Development Authority of India (Other Forms of Capital) Regulations, 2022;

iii.           Insurance Regulatory and Development Authority of India (Manner of Assessment of Compensation to Shareholders or Members on Amalgamation) Regulations, 2021;

iv.            Insurance Regulatory and Development Authority of India (Issuance of Capital by Indian Insurance Companies transacting other than Life Insurance business) Regulations, 2015;

v.             Insurance Regulatory and Development Authority of India (Issuance of Capital by Indian Insurance Companies transacting Life Insurance business) Regulations, 2015;

vi.           Insurance Regulatory and Development Authority (Scheme of Amalgamation and Transfer of Life Insurance Business) Regulations, 2013; and

vii.          Insurance Regulatory and Development Authority (Scheme of Amalgamation and Transfer of General Insurance Business) Regulations, 2011.

[2] Rule 12(6)(a) of the Companies (Share Capital and Debentures) Rules, 2014: There shall be a minimum period of one year between the grant of options and vesting of option:

Provided that in a case where options are granted by a company under its Employees Stock  Option  Scheme  in  lieu  of  options  held  by  the  same person  under  an  Employees  Stock  Option  Scheme  in  another  company, which  has  merged  or  amalgamated  with  the first mentioned  company,  the period  during  which  the  options  granted  by  the  merging  or  amalgamating company were held by him shall be adjusted against the minimum vesting period required under this clause;

[3] Para 2(c) of RBI Guidelines for “on tap” Licensing of Universal Banks in the Private Sector dated August 1, 2016.

[4] For example, paragraph 8 of the minutes of the meeting of 123rd meeting of the IRDAI held on August 18, 2023 lays out a detailed delegation chart of various regulatory processes.

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Photo of Indranath Bishnu Indranath Bishnu

Partner (Head – Insurance) with Cyril Amarchand Mangaldas. His work is focussed on the Insurance industry where he specializes in mergers and acquisitions and joint ventures and regulatory matters. He is currently leading the team from Cyril Amarchand Mangaldas engaged to advise the…

Partner (Head – Insurance) with Cyril Amarchand Mangaldas. His work is focussed on the Insurance industry where he specializes in mergers and acquisitions and joint ventures and regulatory matters. He is currently leading the team from Cyril Amarchand Mangaldas engaged to advise the Regulations Reforms Committee constituted by the Insurance Regulatory and Development Authority. He has advised various government bodies including Department of Financial Services (Ministry of Finance) and the Insurance Regulatory and Development Authority of India on reforms in the insurance sector. He currently serves as a member on the committee constituted by the Insurance Regulatory and Development Authority of India to study and recommend capital requirements for Insurance entities. On the transactional side, Indranath advises multiple corporations, both Indian and foreign, in relation to investments in the insurance sector as well as establishment, operation, management and control of insurance companies and intermediaries in India.  He can be reached at indranath.bishnu@cyrilshroff.com

Photo of Anirud Sudarsan R Anirud Sudarsan R

Principal Associate in the General Corporate practice at the Mumbai office of Cyril Amarchand Mangaldas. Anirud joined the firm in the year 2017 after graduating from West Bengal National University of Juridical Sciences, Kolkata. He advises clients, which include promoters and investors of…

Principal Associate in the General Corporate practice at the Mumbai office of Cyril Amarchand Mangaldas. Anirud joined the firm in the year 2017 after graduating from West Bengal National University of Juridical Sciences, Kolkata. He advises clients, which include promoters and investors of insurers, private equity funds, insurance companies and insurance intermediaries, on mergers & acquisitions and foreign investments in India.

He has worked on several transactions in relation to acquisition of private and public companies, business transfers and initial public offerings in the Indian insurance sector. Anirud also regularly advises insurers and insurance intermediaries in relation to, amongst other aspects: Corporate Governance, General Corporate Strategies, Business Ventures and Partnerships, Distribution and other forms of engagement between insurers and insurance intermediaries and Data Protection, Data transfer, Data Localisation. He can be reached at anirud.sudarsan@cyrilshroff.com

Photo of Shravan Belsare Shravan Belsare

Associate in General Corporate practice in the Mumbai office of Cyril Amarchand Mangaldas. He joined the firm in the year 2021 after graduating from Gujarat National Law University, Gandhinagar. He regularly advises in matters relating mergers & acquisitions and private equity investments with…

Associate in General Corporate practice in the Mumbai office of Cyril Amarchand Mangaldas. He joined the firm in the year 2021 after graduating from Gujarat National Law University, Gandhinagar. He regularly advises in matters relating mergers & acquisitions and private equity investments with focus on insurance sector and the international financial services centres. He advises on mergers & acquisitions, private equity, insolvency, and foreign investments in India. He advises both Indian and foreign companies, in relation to investments in the insurance sector as well as establishment, operation, management and control of insurance companies in India. He can be reached at shravan.belsare@cyrilshroff.com