EXPOSURE DRAFT OF 'OTHER FORMS OF CAPITAL' REGULATIONS, 2015 ISSUED
The (Indian) Insurance Act, 1938 (as amended by the Insurance Laws (Amendment) Act, 2015) ("Amendment Act") allows the capital of an Indian insurance company to consist of equity shares and such other forms of capital as may be prescribed by regulations.
The Insurance Regulatory and Development Authority of India ("IRDAI") has, by way of a circular dated 28 August, 2015 issued a draft of the IRDAI (Other Forms of Capital) Regulations, 2015 ("Draft OFC Regulations") to govern the issuance of other forms of capital by Indian insurance companies, and has invited stakeholders' comments by 10 September, 2015.
The key changes proposed to be introduced by way of the Draft OFC Regulations are set out below.
I. Key Changes
1.1 Other Forms Of Capital: The permissible 'other forms of capital'/ 'instruments' ("OFC") prescribed are:
- preference share capital1; and
- subordinated debts2 (including debentures).
1.2 Key characteristics of OFC:
- must be fully paid for;
- will be subordinate to the claims of policyholders and all other creditors;
- in case of redeemable preference shares or debentures, the insurer will not pay any incentives for early redemption;
- dividends/interest will be paid out of distributable profits. If such payment may result in net loss or increase in the net loss, prior approval of the IRDAI will be needed provided the insurer maintains its solvency ratio; and
- the insurer must have the discretion to cancel dividend and interest distributions at any time and such cancellation must not be treated as an event of default.
1.3 The OFC will not be permitted to exceed 25% of the paid up equity capital of the insurer.
1.4 Prior approval of the IRDAI - The issuance of OFC by an Indian insurance company will require the prior approval of the IRDAI.
The application seeking approval3 will need to include a confirmation that:
- dividend/interest will not be cumulative; and
- the insurer will not be liable to pay dividend or interest for any financial year, inter alia, if its solvency is below the minimum prescribed by the IRDAI.
1.5 Eligible subscribers of OFC - OFC may be issued through private placement and will be permitted to be subscribed by 'Indian investors', 'foreign investors'4 and such other persons as may be approved by the IRDAI.
1.6 Optionality – Indian insurance companies will not be permitted to issue OFC with put option. However, they may issue OFC with a call option provided the call option has a lock-in of 5 (five) years and is exercised with the prior approval of the IRDAI5.
1.7 Impact on foreign investors
The OFC Regulations are unlikely to give foreign investors any significant advantages or any structuring options since:
- OFC will be included in the 49% foreign investment cap; and
- foreign investors will only be permitted to acquire compulsorily convertible preference shares6.
THE IRDAI (PLACES OF BUSINESS) REGULATIONS, 2015 NOTIFIED
The Insurance Act7 allows an insurer to open a new place of business or close a place of business in India or outside India in the manner specified by regulations.
The IRDAI has, by way of a notification, issued the IRDAI (Places of Business) Regulations, 2015 ("PB Regulations")8 to govern the opening and closing of places of business by an Indian insurance company in India and outside India. Under the erstwhile Insurance Act9, this was governed/regulated by the IRDAI, by way of guidelines (issued from time to time) which have now been consolidated into the PB Regulations.
EXPOSURE DRAFT ON THIRD PARTY ADMINISTRATORS - HEALTH SERVICES REGULATIONS, 2015
The IRDAI had, by way of a circular dated 17 June, 2015 issued an exposure draft of the IRDAI (Third Party Administrators-Health Services) Regulations, 201510 (Draft TPA Regulations) seeking comments from the stakeholders by 1 July, 2015. The final TP Regulations are yet to be notified.
Key provisions of the Draft TPA Regulations are set out below.
- TPAs will need to have a minimum paid up capital of INR 50,000,000 which must be in equity shares. The existing registered TPAs will have to comply with this stipulation within one year from the date of notification of the Draft TPA Regulations.
- The aggregate holdings of equity shares by foreign investors, including portfolio investors, in TPAs will not be permitted to exceed the norms as laid down by the Department of Industrial Policy and Promotion, Government of India.
- Every TPA will have to appoint either a Chief Administrative Officer or a Chief Executive Officer, who will be responsible for the proper day to day administration of the activities of the TPA and ensure compliance with provisions of regulatory requirements.
IRDAI (OBLIGATION OF INSURER IN RESPECT OF MOTOR THIRD PARTY INSURANCE BUSINESS) REGULATIONS, 2015
The IRDAI has, by way of a notification on 2 June, 2015, issued IRDAI (Obligation of Insurer in respect of Motor Third Party Insurance Business) Regulations, 2015 to prescribe the manner in which the obligation of an insurer in respect to motor third party insurance business for a financial year should be arrived at.
The regulations require every insurer to underwrite a minimum percentage of 90% of the overall motor third party insurance business premium of the industry for the immediate preceding financial year. Such minimum percentage must be equivalent to the simple average of insurer's share in total gross premium of the industry and that in total motor insurance premium of the industry, both in the immediate preceding financial year.
1 As defined under the (Indian) Companies Act, 2013 ("Companies Act"). Briefly, "preference share capital", with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to (a) payment of dividend; and (b) repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up.
2 'Subordinated Debts' have been defined in the Draft OFC Regulations as: (a) debentures issued in accordance with provisions of Companies Act and satisfying the criteria laid down in the Draft OFC Regulations; and (b) any other instruments as may be permitted by the IRDAI from time to time.
3 Prescribed as 'Form 1'.
4 All non-resident investors eligible to invest through the Foreign Direct Investment route or the Foreign Institutional Investment route under the (Indian) Foreign Exchange Management Act, 1999 and the rules and regulations made under it ("Exchange Control Regulations").
5 While considering proposals of Indian insurance companies for exercising call option, the IRDAI will, inter alia, take into consideration the insurer's solvency both at the time of exercise of the call option and thereafter.
6 The Exchange Control Regulations do not allow issuance of redeemable/non-convertible preference shares to non-resident investors
7 Section 64VC.
8 These regulations replace the IRDA (Places of Business) Regulations, 2013.
9 The Insurance Act, 1938 as it existed prior to coming into force of the Insurance Laws (Amendment) Act, 2015.
10 The Draft TPA Regulations will supersede: (i) the Insurance Regulatory and Development Authority (Third Party Administrators - Health Services) Regulations, 2001; ii) the Insurance Regulatory and Development Authority (Third Party Administrators - Health Services) (First Amendment) Regulations, 2013; and iii) Insurance Regulatory and Development Authority (Third Party Administrators - Health Services) (Second Amendment) Regulations, 2013.
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