India: Insurance Newsletter – June 2015

REGULATORY UPDATES

THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY OF INDIA (TRANSFER OF EQUITY SHARES OF INSURANCE COMPANIES) REGULATIONS, 2015

The Insurance Regulatory and Development Authority of India ("IRDAI") has, by way of a circular dated 18 May, 2015, issued the IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations, 2015 ("Transfer Regulations") to govern the transfer of equity shares of insurance companies and prescribe conditions where such transfer would require prior approval of the IRDAI.

Key provisions of the Transfer Regulations are set out below.

  1. Meaning of 'transfer of shares': It includes transfer of shares from an existing shareholder to another person and also a fresh issue of equity shares that changes the 'shareholding pattern'1 of an insurance company.
  2. Prior approval: The IRDAI's prior approval is required for registration of transfer of shares where:

    1. the transfer results in the total paid up holding of the transferee in the shares of the insurance company to exceed 5% of its paid up capital; and
    2. the nominal value of the shares intended to be transferred by any individual, firm, group, constituents of a group, or body corporate under the same management, jointly or severally will exceed 1% of the paid up equity capital of the insurance company.
  3. Conditions for approval: While providing approval to 'Indian promoters'2 and 'foreign investors'3 to hold shares in an insurance company, the IRDAI may prescribe conditions such as:

    1. a minimum lock-in period; and
    2. infusion of additional capital (in proportion of its shareholding or otherwise at periodic intervals) to ensure compliance with solvency requirements.
    Comments

    Under the erstwhile regulatory framework, the IRDAI had, by way of a circular clarified that it may impose conditions in relation to minimum lock-in and requirement to infuse additional capital to meet solvency requirements on a proposed transferee or shareholder. This has now been incorporated under the Transfer Regulations.

    While the Transfer Regulations do not clarify/indicate the minimum lock-in period, a cue may be taken from the earlier regime where a minimum lock-in of 5 (five) years was imposed on "promoters". For investors other than promoters, the IRDAI did not fix a minimum lock-in period.
  4. Limit on holdings of 'Indian investors': No 'investor'4 (excluding the foreign investors) is permitted to singly hold shares in an insurance company exceeding 10% of the paid up equity share capital of such insurance company. Further, all 'investors' together (excluding the foreign investors) are not permitted to jointly hold more than 25% of paid up equity share capital of such insurance company.

SECOND EXPOSURE DRAFT ON REGULATIONS FOR OPERATIONS OF BRANCH OFFICES OF FOREIGN REINSURERS (EXCLUDING LLOYD'S)

Pursuant to the promulgation of Insurance Amendment Act, the IRDAI had issued an Exposure Draft on Regulations for Registration and Operations of Branch Offices of Foreign Reinsurers (excluding Lloyd's) on 7 April, 2015 seeking comments from the stakeholders by 30 April, 2015. Based on the feedback received, the IRDAI has, by way of a circular dated 27 May, 2015, issued a second Exposure Draft on Regulations for Foreign Reinsurers ("Second Draft Regulations") inviting comments from stakeholders by 3 June, 2015.

The key changes proposed in the Second Draft Regulations are set out below.

  1. The requirement for an applicant to infuse a minimum assigned capital into the branch office has been increased from INR 500 mn to INR 1 bn.
  2. The requirement for an applicant to have a minimum credit rating has been changed from "BBB" of Standard & Poor to "stable outlook" from any of the internationally renowned credit rating agency.
  3. Annual fee has been changed to 1/20th of 1% of the total premium in respect of facultative reinsurance accepted in India during the financial year preceding the year in which the annual fees is required to be paid subject to a minimum of INR 500,000 and maximum of INR 100 mn.
  4. The branch office of the foreign reinsurer will be permitted to open offices in different parts of the country with the prior approval of the IRDAI.
  5. The branch office of foreign reinsurer will be required to retain the core activities such as underwriting, claims settlement and regulatory compliances. Such branch office may, however, outsource functions such as back-office servicing, investment, information technology, accounts, marketing, human resources, administration and publicity. Outsourcing of any other function(s) will require the prior approval of the IRDAI.
  6. An applicant will make a requisition for registration application for reinsurance business in any one of the following: Category I - those with the order of preference of cessions at par with the Indian reinsurer(s) and Category II - others.
  7. Every Indian insurer, in order of preference, will be permitted to offer for participation in its facultative and treaty surpluses to the following: (a) the Indian reinsurer or those who are granted certificate of registration in Category I or other Indian insurers; (b) those who are granted certificate of registration in Category II, only after having offered to all entities in (a); (c) the offices of insurers set-up in Special Economic Zone, only after having offered to all entities in (a) and (b); and (d) the balance may then be offered to overseas reinsurers.

EXPOSURE DRAFT ON AMENDMENTS TO REGISTRATION OF INDIAN INSURANCE COMPANIES

The IRDAI has, by way of a circular dated 11 May, 2015 issued an Exposure Draft of IRDAI (Registration of Indian Insurance Companies) (Seventh Amendment) Regulations, 2015 ("Draft Amendment Regulations"), inviting comments from interested stakeholders by 8 June, 2015.

Key provisions of the Draft Amendment Regulations are set out below.

  1. Health insurance and reinsurance will be recognised as separate classes of business for requisition of registration application (in accordance with the Insurance Amendment Act).
  2. Every insurer will be required to comply with the provision of "Indian owned and controlled5" as specified in the Insurance Amendment Act6. Existing insurers will also be required to comply with "Indian owned and controlled" requirement within 6 months from the date of the notification of Draft Amendment Regulations. This time period may be extended by the IRDAI on an application made to it subject to maximum period of 1 year from the date of notification of the Draft Amendment Regulations.
  3. An applicant aggrieved by the IRDA's decision can appeal to the SAT within 30 days.
  4. The annual fee for applicants will be 1/20th of 1% of total gross premium written direct by an insurer in India during the financial year preceding the year in which the annual fee is required to be paid subject to minimum of INR 500,000 and maximum of INR 100 mn.

APPEAL BY SBI LIFE INSURANCE COMPANY LIMITED AGAINST IRDAI'S ORDER TO SECURITIES APPELLATE TRIBUNAL

SBI Life Insurance Company Limited ("SBI Life") has recently appealed to the Securities Appellate Tribunal ("SAT") against an order of the IRDAI directing refund of INR 2.75 bn to its policyholders. Notably, the appeal has been filed against an order passed in May, 2014 when there was no provision for appeals to the SAT against orders of the IRDAI.

Subsequently, with the passing of the Insurance Laws (Amendment) Act, 2015, ("Insurance Amendment Act") the law has been amended to empower SAT7 to hear appeals against the orders passed by the IRDAI. News reports suggest that the SAT has accordingly admitted the petition/appeal8. This is likely to stir other insurers to appeal against IRDAI's orders to avoid payments of any penalties imposed.

Given that the SAT has admitted the appeal, its decision in the matter will be binding on both the IRDAI and SBI Life unless either of IRDAI or SBI Life appeals to the Supreme Court.

Footnotes

1 'Shareholding pattern' means the shareholding pattern which was approved by the IRDAI at the time of grant of certificate of registration or at any subsequent time.

2 'Indian promoter' includes: (i) a company formed under the Companies Act, 1956 (which is not a subsidiary as defined in such Act); (ii) a banking company as defined under the Insurance Act, 1938 not including a foreign bank or branch thereof functioning in India; (iii) a public financial institution as defined in the Companies Act, 1956; and (v) a person, who is an Indian citizen or a combination of persons who are Indian citizens.

3 'Foreign investors' means all eligible non-resident entities or persons resident outside India investing in the equity share of an Indian insurance company, as permitted to do so through the Foreign Direct Investment and Foreign Portfolio Investment windows under Foreign Exchange Management (Transfer or issue of Security by a Person Resident Outside India) Regulations, 2000;

4 An investor is a person eligible to invest in the equity shares of insurance companies and includes a 'foreign investor'.

5 'Control' for the purposes of 'Indian owned and controlled' has been defined 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.

6 Section 2(7A) of the Insurance Amendment Act.

7 Prior to the Insurance Amendment Act, the SAT could hear appeals only against the orders passed by the Securities and Exchange Board of India.

8 According to news reports the matter has been fixed for hearing on 9 July, 2015.

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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