India: IRDAI (Registration of Indian Insurance Companies) Regulations Amendments: Much Awaited Clarification on Calculation of Foreign Investment

Last Updated: 7 April 2016
Article by Celia Jenkins

The Indian insurance sector has witnessed various reforms since the notification of the Insurance Laws (Amendment) Act 2015 (Amendment Act). The latest addition to the long list of regulatory changes that have been introduced post the Amendment Act is the IRDAI (Registration of Indian Insurance Companies) (Seventh Amendment) Regulations 2016 (Registration Amendment Regulations). Although the Registration Amendment Regulations were notified on 22nd February 2016 (and have come into force on 22nd March 2016), they were released on the official website of the Insurance Regulatory and Development Authority of India (IRDAI) only on 1st April 2016.

The Registration Amendment Regulations have introduced a number of key changes to the existing IRDA (Registration of Indian Insurance Companies) Regulations 2000 (Registration Regulations). The primary amendments introduced by the Registration Amendment Regulations include the following:

  • An applicant whose IRDAI/R1 has been rejected by the IRDAI will now be able appeal to the Securities Appellate Tribunal.
  • A requisition for registration application may now be made for the Life insurance business; General insurance business; Health insurance business (exclusively); or Reinsurance business.
  • An applicant whose requisition has been accepted may make an application in Form IRDAI/R2 for grant of certificate of registration. In cases where the foreign direct investment in the applicant entity is more than 26%, the Form IRDAI/R2 is required to be accompanied by, inter alia, a certified copy of the approval given by the Foreign Investment Promotion Board (FIPB) in accordance with the Indian Insurance Companies (Foreign Investment) Rules 2015.
  • The manner of calculation of equity capital held by foreign investors prescribed by R11 of the Registration Regulations has been amended to state that the calculation of the holding of equity shares by one or more foreign investors in an applicant company, shall be the aggregate of:

    • The quantum of paid up equity share capital held by the foreign investors including foreign venture capital investors, in the applicant company; and
    • The proportion of the paid up equity share capital held or controlled by such foreign investor(s) either by itself or through its subsidiary companies in the Indian promoter(s) or Indian investor(s) as mentioned above.

Provided that this shall not be applicable to an Indian promoter or Indian investors which is a banking company or a public financial institution.

  • Every Insurer being an Indian insurance company and who has already been granted certificate of registration for carrying on insurance business in India must ensure compliance with norms pertaining to "Indian owned and controlled" as specified in §2(7A) of the Insurance Act 1938, within such period as may be specified by the IRDAI.
  • New formats for Form IRDAI/R1 and IRDAI/R2 have now been introduced.

Although all the changes introduced by the Registration Amendment Regulations will have an impact on any entity proposing to operate as an Insurer in India, the amendments made to R11 will, in all probability, have the most lasting impact. It is interesting to note that even prior to the amendments, the approach of the regulator in calculating the foreign investment in an Indian Insurance Company was to not include any foreign investment in the Indian promoter of an Indian insurance company, in the event that such foreign investment was not made by any entity that was a shareholder of the Indian Insurance Company.

If the followed approach was now varied, it would result in the existing structures of some of the major Indian Insurance Companies coming under scrutiny. However, R11 has been amended to provide that the total foreign investment in an Indian Insurance Company will be the sum total of the quantum of paid up equity share capital held by the foreign investors (including foreign venture capital investors), in the applicant company and the proportion of the paid up equity share capital held or controlled by such foreign investor(s) either by itself or through its subsidiary companies in the Indian promoter(s) or Indian investor(s) of the applicant entity.

From a plain reading of the amended R11 it appears that the IRDAI has adopted the approach that only if the foreign investor which is a shareholder of the Indian insurance company is also a shareholder of the Indian promoter(s) or Indian investor(s) of such applicant entity, will the shareholding of the foreign investor in the Indian promoter(s) or Indian investor(s) be taken into consideration for calculating the total foreign investment in the Indian Insurance Company. This amendment will undoubtedly be welcomed by the Indian insurance industry.

The Registration Amendment Regulations have also introduced the requirement of providing a copy of the FIPB approval if the quantum of foreign investment in the applicant entity is more than 26%. However, post notification of the Registration Amendment Regulations the Ministry of Commerce and Industry, Department of Industrial Policy and Promotion has amended the Consolidated FDI Policy 2015, pursuant to which foreign investment in Indian Insurance Companies and insurance intermediaries upto 49% has been brought under the automatic route. In view of these changes, it is anticipated that the Registration Amendment Regulations to be amended further in order to bring them in conformity with the Consolidated FDI Policy 2015.

From the amendments notified, it appears that the feedback received from stakeholders has been taken into account while carrying out the amendments to the Registration Regulations. The amendments on significant points are welcomed clarifications and will definitely go far in encouraging investment in the Indian insurance sector and promoting the growth and expansion of the sector.

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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