November 29 2022

Exposure draft on IRDAI Registration Regulations: overhaul of existing regulations

Tuli & Co | Insurance - India

Shubhangi Pathak, Harshit Dhandhia

Introduction
Proposed amendments
Comment


Introduction

On 13 October 2022, the Insurance Regulatory and Development Authority of India (IRDAI) released an exposure draft on the IRDAI (Registration of Indian Insurance Companies) Regulations 2022 (the draft regulations). The draft regulations follow from the recent increase in the permissible limit of foreign direct investment in insurance companies and other related changes to the insurance regulatory framework in India, and also propose several amendments to the existing IRDAI (Registration of Indian Insurance Companies) Regulations 2000 (the Registration Regulations).

Proposed amendments

The draft regulations propose to make several changes to the existing requirements and procedures for the registration of an insurance company in India. Some of the key changes proposed are as follows:

  • The draft regulations propose that the applicant company or cooperative society (the applicant) must obtain a no-objection certificate (NOC) from the IRDAI in order to use the word "insurance" or "assurance" within its name. The applicant is required to file a registration application form (IRDAI/R1) along with the specified documentation within six months of obtaining the NOC.
  • Once the IRDAI/R1 is approved, the applicant is required to submit specified documentation for the approval of form IRDAI/R2. On submission of the form and before obtaining the IRDAI's approval, the applicant is required to submit evidence of receipt of equity share application money (in accordance with the applicable law) and an affidavit by the applicant, its promoters and its investors, confirming that upon grant of certificate of registration (COR), the equity share application money will be converted into paid-up equity share capital of the applicant.
  • The applicant will receive the COR in form IRDAI/R3, subject to certain conditions:
    • The applicant, its promoter and its investor must comply with the "fit and proper" criteria.
    • The promoter and investor must remain compliant with the lock-in period on their shareholding, as specified, from the date of grant of the COR.
    • The shareholders of the applicant must not create any encumbrance on the equity shares of the insurance company.
  • Where the applicant is promoted by a special purpose vehicle or a non-operative financial holding company, the applicant is required to comply with certain conditions – namely:
    • no type of convertible instruments may be issued;
    • no stock options or sweat equity shares may be issued to the employees or directors of the company.
  • The draft regulations specify certain eligibility criteria, with which the promoter of an applicant must comply. A promoter should generally not be a subsidiary of any other entity. However, certain exceptions are proposed to be introduced to this norm, where such promoter entity:
    • is listed on the stock exchange in India;
    • has its own source of funds independent from its holding company;
    • has a net worth of at least 5 billion rupees; and
    • has a holding company which is not a subsidiary of any other company.
  • Investment in an insurance company may be made in the capacity of an investor, subject to certain conditions:
    • The investment must be less than 25% of the paid-up equity share capital of the insurance company; and
    • Investment in the capacity of the investor shall be restricted to not more than two life insurance companies, two general insurance companies, two health insurance companies and two reinsurers. However, this limit will not be applicable for investments of up to 10% of the paid-up equity capital of the insurance company.
  • Investment in an insurance company may be made in the capacity of the promoter subject to certain conditions:
    • The promoter should not be a promoter of more than one life insurance company, one general insurance company, one health insurance company and one reinsurer; and
    • The promoter should otherwise be eligible to act as a promoter under the draft regulations.
  • Investment by a private equity (PE) fund in an insurance company may be made either in the capacity of a promoter or an investor. However, for a PE fund to invest in the capacity of a promoter, certain additional conditions have been proposed:
    • The PE fund or its parent fund must have been in operation for 10 years;
    • The funds raised by the PE fund, including its group entities must be at least $500 million;
    • The investible funds available with the PE fund must be at least $100 million;and
    • The PE fund must have invested in the financial sector in India or other jurisdictions.

Comment

The draft regulations propose significant changes to the existing Registration Regulations on various key points. However, for the proposed changes to be brought into effect, it is believed that certain other IRDAI guidance – such as the IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations 2015 (the Transfer Regulations) and the IRDAI (Investment by Private Equity Fund or Alternate Investment Fund in Indian Insurance Companies) Guidelines 2017 (the PE Guidelines) may also need to be amended for consistency with the draft regulations.

By way of example, the Transfer Regulations state that the maximum amount of shareholding by an Indian investor should not exceed 10% of the paid-up equity share capital of the insurance company, and cumulatively the total investment by investors should not be more than 25%. These limits are different from the limits proposed under the draft regulations. Similarly, the draft regulations provide certain additional criteria for a PE fund to act as a "promoter", such as the investible funds requirement and the minimum number of years of operation requirement mentioned above. However, these requirements are not set out in the PE Guidelines. Therefore, the Transfer Regulations and the PE Guidelines will also need to be amended to bring them in conformity with the revised Registration Regulations once the draft regulations are finalised and notified.

In addition, by way of a press release on 17 August 2022, the IRDAI had proposed a single window NOC portal for the applicant to obtain the NOC from the IRDAI and assist with the incorporation in a hassle-free and timebound manner. However, in their current format, the draft regulations do not appear to provide for a single window NOC portal.

While the draft regulations propose various amendments to the existing regulatory framework that may be welcomed by industry participants, the Indian insurance industry is also awaiting simplification of the registration process. Various press reports over the past few months have indicated that several changes in terms of the eligibility criteria and the process for registering an insurance company are in discussion.

For further information on this topic please contact Shubhangi Pathak or Harshit Dhandhia at Tuli & Co by telephone (+91 11 2464 0906) or email ([email protected] or [email protected]). The Tuli & Co website can be accessed at www.tuli.co.in.