The control and acquisition of entities in India by foreign investors and private equity funds (PE Funds), is regulated by the foreign investment norms specified by the Reserve Bank of India (RBI), the norms specified by the Securities Exchange Board of India (SEBI) (where the entity is a listed entity), and any other laws/regulations governing the business of the target entity. Entities engaged in insurance business are required to follow additional norms regarding foreign investment as specified by the Insurance Regulatory and Development Authority of India (IRDAI). In this article we have set out the frequently asked questions in relation to foreign investment in insurance companies, and the responses to these questions in light of the extant insurance statutory and regulatory framework.
- 1. What are the limits of direct foreign investment (if any) with respect to Indian insurance companies?
Per the Insurance Act, 1938 as amended (Insurance Act) foreign investment in Indian insurance companies is permitted up to 49% of the paid up equity capital of such Indian insurance company. In addition, Indian insurance companies are required to be Indian owned and controlled at all times. The norms in this regard are set out under the guidelines on 'Indian owned and controlled' issued by the IRDAI by way of an October 19 2015 circular. The key considerations to ensure that an insurance company is Indian owned and controlled are:
- The insurance company is required to be under Indian “control”. The term 'control' has been defined under the Insurance Act to include the right to appoint a majority of the directors or control management or policy decisions, including by virtue of shareholding or management rights or shareholders' agreements or voting agreements.
- The majority of the board of directors – excluding independent directors – must be nominated by the Indian promoters and investors.
- Key management personnel – including the chief executive officer (CEO) and the principal officer – must be appointed by the board of directors or by the Indian promoters and investors.
- Foreign investors may nominate a key management person (excluding the CEO), but the board of directors must approve the nominee.
- If the chair of the board of directors has a casting vote, he or she must be nominated by the Indian promoters and investors.
- A valid quorum for a board meeting will be constituted with the presence of a majority of the Indian directors.
Press reports indicate that the government is considering increasing the FDI limit in insurance companies from 49% to 74%. In the event the FDI limit is increased, IRDAI will in all probability revisit certain pre-existing norms, such as norms on Indian ownership and control norms as applicable to insurers, and foreign investors will need to watch out for these amendments/clarifications to better understand the way in which business will need to be undertaken.
- What considerations may be taken into account at the time of entry into the Indian insurance sector?
Per section 6A of the Insurance Act read with the IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations 2015, prior approval from the IRDAI must be obtained in the event of a change in shareholding of an insurance or reinsurance company where, after the transfer, the total shareholding of the transferee is likely to exceed 5 per cent of the total paid-up capital of the company. In addition, prior approval of the IRDAI must also be obtained if 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, exceeds 1 per cent of the total paid-up capital of the insurance or reinsurance company.
There are no specific provisions dealing with background investigations of officers and directors of acquirers. However, while obtaining the IRDAI's approval, information may be required to be submitted regarding whether the directors of the transferee have ever been refused a licence or authorisation in the past to carry out regulated financial business or whether any company, firm or organisation with which such directors have been associated as directors, officers or managers has been investigated by a regulatory or professional body.
The IRDAI (Registration of Indian Insurance Companies) Regulations, 2000 also provide a reporting requirement, where every insurer must provide a statement indicating any shareholding changes exceeding 1% of the paid up capital of the promoter, within 45 days of the end of every quarter. However, any change in excess of 5% of the paid up capital of the promoters must be reported to the IRDAI immediately.
- Are PE Funds/ alternate investment funds permitted to invest in Indian insurance business?
Prior to 2017, investment by PE Funds in Indian insurance companies was not specifically regulated. However, as PE Funds started investing in Indian insurance companies and the promoters of Indian insurance companies, a need was felt to regulate such investments keeping in mind the nature of investments that may be made by PE Funds. The IRDAI on 5 December 2017 issued the IRDAI (Investment by Private Equity Funds in Indian Insurance Companies) Guidelines 2017 (Guidelines), to regulate private equity investment in insurance companies.
The Guidelines allow for PE Funds to invest either directly in Indian insurers in the capacity of an investor or to invest through a special purpose vehicle (SPV) in the capacity of a promoter in the insurer. A PE Fund is therefore permitted to invest in Indian insurance companies either as a promoter, where its investment exceeds 10% of the equity capital of the insurer (through an SPV), or as an investor where its investment is less than or equal to 10%.
Where a PE Fund invests directly in the insurer, the fund cannot hold more than 10% of the paid-up equity share capital in the insurer. Further, in such a scenario, all Indian investors, including PE Funds, cannot jointly hold more than 25% of the paid-up equity share capital of the insurer.
- What are the exit strategies that may be followed by foreign investors to exit from insurance companies?
Where the foreign entity is identified as a promoter of the insurer, the entity will be bound by the lock-in period as specified under the applicable norms, and/or other conditions in relation to exit as imposed by the IRDAI at the time of investment.
The exit strategy most commonly adopted by foreign investors to exit from Indian insurance companies is private sale. There are limited legal restrictions prescribed under the regulatory framework in relation to the person to whom such private sale of shares may be done, and the primary restrictions emanate from contractual obligations. Transfer restrictions under shareholders' agreements and constitutive documents, include, inter alia, rights of first refusal, rights of first offer, co-sale rights, and put and call options.
Shareholders' agreements executed between the company, the promoters and investors, often also include an obligation on the company and its promoters to provide investors with an exit through an initial public offering (IPO) within a defined timeline. These obligations, however, are not entirely binding on the company, as IPOs are largely market-driven. With the notification of the Guidelines, divestment to PE Funds has become another option that investors are considering for exiting insurance companies.
- What are the exit strategies that may be followed by PE Funds to exit from insurance companies?
Where a PE Fund invests in an insurer through an SPV in the capacity of a promoter, it cannot leave at will. The Guidelines stipulate a five-year lock-in period for an SPV which invests in the insurer and the investors of the SPV (holding more than 10%) of the SPVs capital. Private equity investors in India prefer to exit either through private sales or IPOs. IPOs continue to be the exit route of choice for most private equity investors, given larger access to capital and free transferability of shares.
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.