India: The Insurance Ordinance 2014

The President of India has signed an ordinance ("Ordinance") on the Insurance Laws (Amendment) Bill, 2008 read with the Insurance Laws (Amendment) Bill, 2014 ("Insurance Bill") inter alia, to enhance foreign investment in Indian insurance companies to 49% from the existing 26%. The Union Cabinet had approved the promulgation of the Ordinance as the Insurance Bill could not be taken up for consideration and passing at the conclusion of the winter session of Parliament. The Ordinance has been published in the official gazette on 26 December, 2014.

Some key issues in relation to the Ordinance have been dealt with below.

KEY AMENDMENTS AND CHALLENGES TO THE ORDINANCE

I. Legislative action

Since the Insurance Act, 1938 ("Insurance Act") has been amended through the ordinance route, the Government would have to ensure that the Ordinance is approved by both the houses of Parliament within six weeks of Parliament's re-assembly for the next session in February, 2015. If the Government fails to have the Ordinance approved within such period of 6 weeks or if before the expiry of such period resolutions disapproving the Ordinance are passed by both the houses of Parliament, the Ordinance will lapse and the government will have to explore alternative options to bring about the proposed insurance sector reforms.

Owing to a lack of majority of the ruling party in the Upper House, the Ordinance is unlikely to be approved by the Upper House unless the ruling party successfully mobilises its support. Consequently, while the Lower House (in which the ruling party has majority) would be expected to approve the Ordinance, the Upper House is likely to delay the approval of the Ordinance and ensure that it lapses.

In the event the Ordinance lapses, it is possible that the Government will re-promulgate the Ordinance. The Government has recently re-promulgated an ordinance on coal sector reforms upon its lapse during the last session of Parliament. The process for re-promulgation would be the same as discussed above.

II. Increase in foreign investment

The Insurance Act has been amended to allow foreign investment (including investment through FDI route and FII route) to up to 49% in Indian insurance companies1.

This would now require a corresponding amendment in the foreign direct investment ("FDI") policy and the exchange control regulations to reflect the change in the sectoral cap for insurance. Similarly, the regulations issued by the Insurance Regulatory and Development Authority of India ("IRDA") under the Insurance Act would also require appropriate amendments. For instance, the IRDA (Registration of Indian Insurance Companies) Regulations, 20002 would need to be amended to clarify the manner of calculation of the 49% equity holding in an Indian insurance company.

III. Interpretation of "control" – 26% rights better than 49% rights?

The Ordinance permits foreign investment to up to 49% in an Indian insurance company but with Indian ownership and control. The term "control" has been defined to include the right to appoint the majority of directors or to control the management or policy decisions, including by virtue of shareholding or management rights or shareholder agreements or voting agreements. The definition is similar to the one used in the Companies Act, 2013 ("Companies Act") and the the Securities and Exchange Board of India ("SEBI") (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 ("Takeover Code").

At present, there is no precedent on whether negative/veto rights would amount to "control" under the Companies Act or the Takeover Code. There is accordingly lack of clarity on what would constitute "control" for the purposes of the amended Insurance Act and the statement of objects and reasons to the Ordinance also do not throw any light on this issue. The key concern any foreign investor would have is whether the effect of Indian "control" would be that typical minority protection rights would be considered to give the investor control.

While the IRDA would be expected to adopt a balanced view on this issue, in the event courts take the view that veto/negative rights would be considered to be "control" under the Takeover Code or the Companies Act, then the ability of foreign investors to have reasonable protection which they currently have as 26% shareholder in insurance joint ventures may be impacted.

IV. Other key amendments at a glance

  1. Foreign companies will be permitted to engage in re-insurance business in India through a branch established in India. The term "foreign company" has been defined to mean a body incorporated under the law of any country outside India and including Llyods established under the (United Kingdom) Lloyd's Act, 1871 or its members.
  2. Insurers will have the right to appeal against orders passed by the IRDA before the Securities Appellate Tribunal.
  3. Insurers carrying on exclusively the business of health insurance will be required to have a minimum paid up equity capital of INR 1,000,000,000.
  4. Indian promoters will no longer be required to divest their shareholding in an Indian insurance company in excess of 26%.
  5. The capital of an insurance company will be permitted to consist of equity shares and such other forms of capital as may be prescribed by regulations.
  6. Insurers will be vicariously liable for all violations of their agents including violation of code of conduct specified by the Insurance Regulatory Development Authority of India ("IRDA") by regulations. Any violation can result in a penalty of up to INR 10,000,000 being imposed on insurers.
  7. Insurers will be prohibited from soliciting or procuring insurance business through 'multi-level marketing' schemes i.e., any arrangement for soliciting or procuring insurance business through unlicensed agents with or without commission or remuneration for their services.

Footnotes

1. With Indian ownership and control.

2. These Regulations, amongst others, provide the manner of calculation of the foreign equity holding in an Indian insurance company.

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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