On 19 October 2015, the Insurance Regulatory and Development Authority of India (IRDA) published guidelines on ‘Indian owned and controlled’ (Control Guidelines).

Applicability

The Control Guidelines have come into effect on 19 October 2015 (Effective Date) and require compliance by existing Indian insurance companies (IICs) within 3 months from the Effective Date. IICs which come into existence after the Effective Date are required to comply with the Control Guidelines before grant of registration by the IRDA.

The Control Guidelines apply to IICs which (i) ‘may come into existence after notification of the Act’; (ii) ‘may propose to hike their foreign investment from the existing level’; and (iii) ‘do not intend to increase their current foreign stake from the existing level’. Further, the Control Guidelines are applicable not only to IICs, but also to ‘insurance intermediaries’ as defined under the Insurance Regulatory and Development Authority Act, 1999 (eg. insurance brokers, third party administrators, surveyors and loss assessors, etc.). However, the Control Guidelines will not apply to ‘insurance intermediaries’ which generate 50% or more of their revenue from ‘non-insurance activities’.

Indian Control

The Control Guidelines provide that ‘control’ is evidenced by any one or more of the following criteria in respect of the IIC:

  • by virtue of shareholding in the IIC (the IRDA has clarified that both direct and indirect foreign holding in an IIC shall be computed in accordance with Rule 2(p) of the Indian Insurance Companies (Foreign Investment) Rules, 2015 read with Regulation 11 of the IRDA (Registration of Indian Insurance Companies) Regulations, 2000);
  • management rights;
  • shareholders’ agreements;
  • voting agreements; or
  • any other manner as per applicable laws.

Pursuant to paragraph 4 of the Control Guidelines, the IRDA has expressed that, in order to ensure ‘Indian control’ of the IIC, IICs must ensure the following:

Click here to view table.

Ensuring Compliance

The IRDA will ensure that an IIC complies with the requirement of ‘Indian owned and controlled’ by requiring the IIC to submit an undertaking signed by its CEO or Chief Compliance Officer confirming such compliance (Undertaking). The Undertaking should be accompanied with (i) a certified copy of a resolution of the Board confirming compliance, and (ii) a certified copy of the agreement / joint venture agreement in which amendments have been carried out to give effect to the requirement of ‘Indian owned and controlled’.

Comment

The Control Guidelines provide a view into the regulator’s mind in respect of which shareholder rights are permissible and which may be frowned upon. The Control Guidelines provide a broad picture of ‘Indian control’ and provide a mechanism whereby IICs will ensure compliance. We understand that the IRDA, in light of the Control Guidelines, will examine each shareholders’ agreement / joint venture agreement to determine whether rights granted to a foreign shareholder are acceptable. Accordingly, IICs and their shareholders may have to wait for a few stake increase applications to be cleared before it becomes clear what specific rights are not acceptable. That being said, the publication of the Control Guidelines is a leap forward in providing substantive regulatory clarity by the IRDA.