India: IRDAI Guidelines On "Indian Owned & Controlled"

Last Updated: 28 October 2015
Article by Celia Jenkins

The Indian insurance sector has witnessed sweeping changes in the regulatory regime from the commencement of this year. These changes commenced with the passing of the Insurance laws (Amendment) Ordinance in December 2014 which was later enacted as the Insurance laws (Amendment) Act 2015 (Amendment Act). Arguably, the most significant change introduced by the Amendment Act was the increase in the permissible foreign investment limit in Indian Insurers from the then existing 26% of the paid-up capital of such companies to 49%, provided that the Indian Insurers were 'Indian owned and controlled'.

As a first step to providing a framework for implementing the increase in foreign investment, the Ministry of Finance notified the Indian Insurance Companies (Foreign Investment) Rules 2015 (Rules) on 19th February 2015. The Rules provide that approval from the Foreign Investment Promotion Board, Department of Economic Affairs, Ministry of Finance (FIPB) will need to be obtained for any foreign investment beyond 26% up to the new limit of 49%. The Rules also clarified that the increased FDI limit of 49% will also apply to insurance intermediaries, in accordance with the terms and conditions specified the Rules. In addition, the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, has notified Press Note No 3 of 2015 (Press Note) on 2 March 2015 to amend the Consolidated Foreign Direct Investment Policy, to ensure uniformity with the Rules.

The most recent addition to the regulatory regime governing foreign investment in Indian Insurers has been the Guidelines on "Indian owned and controlled" (Guidelines) issued by the IRDAI by way of a Circular of 19th October 2015. The Guidelines are applicable to Indian Insurers and insurance intermediaries. The salient features of the Guidelines are as follows:

  • The Guidelines have provided some much needed clarity on the aspect of 'Indian control'. The term 'control' has been defined (in the Amendment Act) to include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements. The Guidelines, along similar lines, provide that control can be exercised by the virtue of any one of more of the following: (a) Shareholding; or (b) Management rights; or (c) Shareholders agreements; or (d) Voting agreements; or (e) Any other manner as per applicable laws.
  • The majority of the Board of Directors, excluding independent directors, are to be nominated by the Indian promoters/Indian investors.
  • Key management persons including the CEO and the Principal Officer are to be appointed by the Board of Directors or by the Indian promoters/Indian investors. Foreign investors may nominate a key management person (excluding the CEO) but such key management person will need to be approved by the Board of Directors.
  • Control over "significant policies" should be exercised by an appropriately constituted Board of Directors.
  • In cases where the Chairman of the Board of Directors has a casting vote, the Chairman will also need to be nominated by the Indian promoters/Indian investors.
  • Valid quorum for a board meeting will be constituted with the presence of majority of the Indian directors.
  • The CEO and the Chief Companies Officer are required to file an undertaking with the IRDAI conforming compliance with the 'Indian owned and controlled' criteria as set out in the Guidelines.

While the Guidelines have provided some much required clarity on the interpretation of the term 'Indian controlled', substantial subjectivity in the interpretation of the term still persists. It is clear that the IRDAI requires the constitution of the Board of Directors of Indian Insurers and insurance intermediaries to be with the Indian promoters/Indian investors. However, the nature of 'shareholders agreement', 'management rights' and 'voting agreements' that will be considered as exercising of 'control' still remains to  be seen. Whether the typical joint venture agreements which provide a range of veto rights in relation to the operation and management of the companies to the foreign investors will now need to be revisited, re-negotiated and amended is still an open question.

Another aspect which still needs to be clarified by the IRDAI is the exact manner of calculation of the permissible foreign investment limit of 49%. The Indian insurance industry is still awaiting for the amendments to the IRDAI (Registration of Indian Insurance Companies) Regulations 2000 to be notified and made effective by the IRDAI.

Thus, while the Guidelines do shed some light on certain grey areas surrounding the recent regulatory changes in the Indian insurance sector, more regulatory clarity is still awaited, along with certain aspects which may only get clarified with the practice that will be adopted by the regulator in times to come.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Celia Jenkins
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