Earlier this year, the Insurance Laws (Amendment) Act, 2015 (“Insurance Amendment Act”) amended the Insurance Act, 1938 to enhance the foreign investment cap in insurance companies to 49% (forty-nine percent) and explained control of Indian insurance companies. Further, the Indian Insurance Companies (Foreign Investment) Rules, 2015 and amendment thereto (“Foreign Investment Rules”) clarified Indian ownership of insurance companies. The Insurance Regulatory and Development Authority (“IRDA”) has, on October 19, 2015 issued, a circular (“Circular”) setting out guidelines for “Indian owned and controlled” and on compliance of “Indian owned and controlled” insurance companies. Salient features of the Circular are as follows:
- Existing Indian insurance companies will have to comply with the guidelines within a period of 3 (three) months from the date of the issue of the Circular. IRDA may, grant an extension of additional 3 (three) months to an existing insurance company, on an application setting out valid reasons for such extension request. Insurance companies coming into existence post issuance of the Circular will have to be in compliance with the circular prior to grant of registration by the IRDA.
- Foreign holding in an Indian insurance company, direct as well as indirect, should not exceed the prescribed cap of 49% (forty-nine percent) and total foreign investment will be computed in accordance with the IRDA (Registration of Indian Insurance Companies) Regulations, 2000.
- Control of an Indian insurance company can be demonstrated by virtue of shareholding, management rights, shareholders agreements, voting agreements or in any other manner as per applicable laws.
- To safeguard that an Indian insurance company has “Indian control”, the following conditions will need to be complied with:
- that the majority of the directors, excluding independent director(s), should be nominated by Indian promoter(s)/ Indian investor(s);
- the key managerial personnel (“KMP”), including chief executive officer (“CEO”), managing director, principal officer should be appointed by the Board of Directors of the Indian insurance company (“Board”) or by the Indian promoter(s)/ Indian investor(s). The foreign investor(s) may nominate other KMPs (excluding the CEO), provided that such appointment is approved by the Board comprising majority of directors appointed by the Indian promoter;
- the Board constituted in the manner set out above should have control over significant policies of the insurance company;
- a chairman of the Board having a casting vote can only be appointed by the Indian promoter(s)/Indian investor(s).
- Presence of majority of the Indian directors will be necessarily required to constitute quorum of the Board, irrespective of whether the foreign investor’s nominee is present or not. It is clarified that the right of a foreign investor’s nominee to be present to constitute a valid quorum will be treated only as a protective right and would not amount to control.
- The Indian insurance company will have to file an undertaking, duly signed by the CEO and Chief Compliance Officer, confirming that it has adhered to the compliance(s) of being termed as an “Indian owned and controlled” entity. The undertaking will have to be accompanied by a Board resolution confirming the same and certified copy(ies), where applicable, of any agreement/joint venture agreement, wherein relevant amendments have been made, to give effect to provisions relating to “Indian owned and controlled”.
- The Circular has come into effect immediately and the guidelines will be applicable to Indian insurance companies which may come into existence after the commencement of the Insurance Amendment Act, may propose to increase foreign investment from the existing level and are not looking to increase their current foreign stake from their existing level(s). Insurance intermediaries defined under the IRDA Act, 1999 will also have to comply with these guidelines, provided that non-insurance activities contribute less than 50%(fifty percent) of their revenues.
The guidelines were anticipated for some time to give clarity on the issue of ownership and control of Indian insurance companies. With this Circular, the ambiguity on ownership and control have been clarified and the onus of compliance will be on Indian insurance companies.