The Indian insurance regulatory regime has witnessed sweeping changes in the year 2015. The Insurance Laws (Amendment) Act 2015 (Amendment Act) introduced some much awaited reforms, including, increasing the foreign investment cap in the insurance sector to 49%, permitting overseas reinsurers (who are not admitted in India) to open branch offices to carry out reinsurance business in India and facilitating the entry of Lloyd's of London under regulations yet to be finalized.
With an aim to implement the increase in the foreign investment cap, the Ministry of Finance, Government of India notified the Indian Insurance Companies (Foreign Investment) Rules 2015 (Rules) and the Department of Industrial Policy & Promotion, Ministry of Commerce & Industry notified Press Note No 3 of 2015 (Press Note) to provide that approval of the Foreign Investment Promotion Board, Ministry of Finance (FIPB) will need to be obtained for any foreign investment beyond 26% and up to the permissible limit of 49% in any Indian Insurer or insurance intermediary.
Though the Rules, together with the Press Note did provide some much required clarifications in relation to the manner of increase in foreign investment in insurance companies and insurance intermediaries, certain aspects were still not made abundantly clear, including, the manner of calculation of foreign investment in the Indian promoter, which would in turn impact the calculation of foreign investment in Indian insurance companies and insurance intermediaries.
The next addition to the reforms introduced by the Amendment Act, the Rules and the Press Note was the Insurance Regulatory and Development Authority of India (Transfer of Equity Shares of Insurance Companies) Regulations, 2015 (Regulations). The Regulations, inter alia, provide for a requirement of obtaining prior approval of the IRDAI for transfer of shares of an insurance company similar to the requirement prescribed under the un-amended Insurance Act 1938.
The Regulations specifically prescribe conditions for approval for transfer of shares held by Indian promoters and by foreign investors. For both these categories of shareholders the IRDAI has been authorised to prescribe conditions in relation to, inter alia, minimum lock-in period and infusion of additional capital at periodic intervals to ensure that the Insurer is compliant with the solvency requirements at all times.
An interesting matter to note is that the Regulations provide for a scenario wherein the Indian promoters hold 26%, the Indian investors hold 25% and the foreign investors hold 49% of the paid up equity share capital of the Indian insurance company. In cases where the Indian investors are completely un-related to the Indian promoters the foreign investor is likely to be single largest shareholder of the Indian insurance company. In the capacity as the single largest shareholder the foreign investor may be in a position to control the policy decisions and, in effect, guide the operation of the Indian insurance company. This may in turn create a conflict with the provisions of the Amendment Act, the Rules and the Press Note, all of which require Indian insurance companies to be "Indian owned" and "Indian controlled" at all times.
The latest addition to the foreign direct investment reforms in the insurance sector is the Indian Insurance Companies (Foreign Investment) Amendment Rules 2015 which have been notified by the Ministry of Finance on 3rd July 2015 (Amendment Rules). The Amendment Rules have added a proviso to the definition of "Indian Ownership" which states that the manner of computation of foreign holding of the Indian promoter or Indian Investor Company shall be determined in accordance with the definition of "Total Foreign Investment" as set out in the Rules. The definition of "Total Foreign Investment" provides that the foreign investment in an Indian company would be the sum total of direct and indirect foreign investment by "Foreign Investors" in such company, calculated in accordance with the IRDA (Registration of Indian Insurance Companies) Regulations 2000 (Registration Regulations) read with Para 4.1.4 of the Consolidated FDI policy of the Government of India. Hence, the manner of calculation of the foreign investment in the Indian promoter or the Indian Investor Company will also need to be in accordance with R11 of the Registration Regulations.
Although some news reports seem to indicate that the Amendment Rules have now provided much needed clarity in relation to the manner of calculation of foreign investment in the Indian promoter or the Indian Investor Company, (which in turn impacts the computation of foreign shareholding of the Indian insurance company), the exact interpretation of the Amendment Rules is still linked to R11 of the Registration Regulations.
The Indian insurance industry is, therefore, awaiting a clarification which many anticipate is to state that if the foreign investor who holds shares in the Indian insurance company also holds shares in the Indian promoter of such Indian insurance company only then will the shareholding of the foreign investor in such Indian promoter be taken into consideration for computing the total foreign shareholding of the Indian insurance company and investments by other foreign investors in the Indian promoter will not be counted downstream.
In relation to the Registration Regulations, the IRDAI released an exposure draft on the IRDA (Registration of Indian Insurance Companies) (Seventh Amendment) Regulations 2000 (Exposure Draft). Although the Exposure Draft does provide an amended version of R11, such amended version does not clearly set out the view discussed above.
The Indian insurance industry is eagerly awaiting for these clarifications and further amendments to firm up their investment plans and to determine the manner in which the Rules, the Registration Regulations and the Consolidated FDI Policy are applied harmoniously by the two regulators ie the IRDAI and the FIPB.
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