India: Private Equity Investments In The Indian Insurance Sector

Recent changes to the framework regulating investments in the Indian insurance sector are a welcome effort as the appetite for private equity funds to invest in Indian insurance companies increases.

India is expected to be 1 of the fastest-growing insurance markets in the coming decade.¹ This substantial growth impetus is largely due to increased private sector participation, renewed distribution capabilities, and overall improvement in operational efficiencies over the past 2 decades. The Government of India and the Insurance Regulatory and Development Authority of India (IRDAI) have committed to ensuring 'Insurance for All by 2047' keeping with the larger aim of increasing financial inclusion by accelerating reforms.² The Government has also taken steps to liberalise the insurance sector, including increasing the sectoral caps on foreign direct investment in the insurance sector from 49% to 74%³, overhauling the regulatory regime governing registration of insurance companies through the IRDAI (Registration of Indian Insurance Companies) Regulations, 2022 (Registration Regulations), and the introduction of the IRDAI (Other Forms of Capital) Regulations, 2022 (OC Regulations).

1 of the main focuses of the IRDAI for attaining the goal of 'Insurance for All by 2047' is to strengthen the 3 pillars of the insurance ecosystem⁴, amongst others: by (i) facilitating the ease of doing business in the insurance sector; and (ii) boosting innovation, competition and distribution efficiencies while mainstreaming technology and moving towards a principle-based regulatory regime. Accordingly, the Registration Regulations subsume the IRDAI (Registration of Indian Insurance Companies) Regulations, 2000 and the IRDAI (Transfer of Equity Shares) Regulations, 2015 with the intent of simplifying the process of setting up an insurance company in India. While the Registration Regulations did not formally rescind the IRDAI (Investment by Private Equity Funds in Indian Insurance Companies) Guidelines, 2017 (PE Guidelines), the IRDAI Master Circular on Registration of Indian Insurance Company, 2023 clarified that the PE Guidelines stood repealed.⁵

Regulatory Analysis

Previously under the PE Guidelines, private equity funds, in their capacity as investors, were only permitted to invest in 10% or less of the capital of Indian insurance companies, and any holding higher than 10% would require the investor to be classified as a promoter.⁶ Further all investments by a private equity fund in the capacity of a promoter had to be through an Indian special purpose vehicle (SPV).⁷ Moreover, the PE Guidelines also imposed restrictions on the collective holding of private equity investors – all Indian investors who are not promoters, including private equity investors could not hold more than 25% of the paid-up share capital of an insurer, and all investors – whether Indian or overseas investors – who are not promoters could not hold more than 50% of the paid-up share capital of an insurer.⁸ The PE Guidelines also prohibited investments exceeding 10% in multiple insurers of the same class.⁹

These restrictions have large been relaxed by the Registration Regulations. Private equity funds no longer mandatorily need to invest through an Indian SPV to acquire more than 10% and can hold up to 25% as investors.¹⁰ Significantly, the IRDAI has widened the scope of entities that can be classified as private equity funds under the Registration Regulations to include not just alternate investment funds registered with the Securities and Exchange Board of Indian but also investment funds registered with the International Financial Services Centres Authority and investment funds which themselves or through their managers are registered in Financial Action Task Force compliant jurisdictions.¹¹ Although, private equity funds desirous of investing as promoters have to meet additional qualifications including regarding fund life, capital adequacy and availability of investible funds.¹² Furthermore, restrictions on collective holding have been diluted such that there is no limitation on the holding of all 'Indian Investors', and in the case of unlisted insurers, the total holding of investors must be less than 50%.¹³ The Registration Regulations also provide that investors may invest: (i) up to 10% in any number of insurers; and (ii) between 10% and 25% in a maximum of 2 insurers of each class.¹⁴ The Registration Regulations have also significantly revised the lock-in restrictions applicable to investors such that the duration of the lock-in period reduces as the insurer ages.¹⁵

While the Registration Regulations have made it easier to set up insurance companies, and have reduced the burden of compliance for investment, the OC Regulations have liberalised the process for insurers to raise additional funds from private equity funds and other investors. The IRDAI has dispensed with the requirement for prior approval for issuance of subordinated debt and preference shares by insurers.¹⁶ Additionally, under the OC Regulations the overall cap for issuance of such subordinated debt and preference shares has been increased from 25% to 50% of the paid-up share capital and 50% of the net worth of an insurer.¹⁷

Increased PE Participation

The IRDAI has recently formed a 15-member consultative committee on investments (Investments Committee). While broader review functions are also carried out by existing groups such as the insurance regulations review committee and various sub-groups set up by the Life Insurance Council and the General Insurance Council, the Investments Committee will specifically review, monitor and advise the IRDAI on the regulatory framework for managing investments in the insurance sector, developments in the economy, financial markets and on risk management. ¹⁸

It is pertinent to note that the Investments Committee also includes members from a private equity background¹⁹ and the majority of the members are from the private sector. Not only does this signify the governmental intent to promote increased participation by private equity funds in the insurance space but also the growing interest of private equity funds to invest in the insurance space. The amplified focus on innovation in the insurance sector with the advent of hybrid insurance technology solutions to warrant deeper market penetration²⁰ also presents a plethora of novel investment opportunities for private equity funds.

Looking Ahead

The operational issues stemming from the implementation of the Registration Regulations and OC Regulations remain to be seen as the revised regulatory framework is very nascent. The review period for both the Registration Regulations and OC Regulations is the next 3 years, which will most likely determine whether the revised regulatory framework is an effective step towards achieving 'Insurance for All by 2047'. However, it is certain that the revisions to the extant law have streamlined and clarified the framework for investments by private equity investors in the insurance sector. Further, all market indicators seem to suggest that the IRDAI is keen on facilitating increased private equity participation in the insurance sector.

Footnotes

1. Insurance Industry in India - Insurance Sector Market Analysis – available at (https://www.investindia.gov.in/sector/bfsi-insurance) and last accessed at 1020 hours on 9 May 2023.

2. IRDAI Press Note dated 25 November 2022 on "Insuring India by 2047 - New landscape for Insurance Sector" –available at (https://irdai.gov.in/document-detail?documentId=1624671) and last accessed at 1026 hours on 9 May 2023.

3. Entry F8 of Schedule I, Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 (from 19 August 2021).

4. The 3 pillars of the insurance ecosystem are: (i) insurance customers (i.e. the policyholders); (ii) insurance providers (i.e. insurers); and (iii) insurance distributers (i.e. intermediaries).

5. IRDAI Master Circular dated 24 April 2023 on Registration of Indian Insurance Company, 2023.

6. Paragraph 3(ii) and Paragraph 5, Part B of the PE Guidelines.

7. Paragraph 5, Part B of the PE Guidelines.

8. Paragraph 3(iii) and (iv), Part B of the PE Guidelines.

9. Paragraph 5(i), Part B of the PE Guidelines.

10. Regulation 6(7)(i) read with Regulation 6(9) of the Registration Regulations.

11. Regulation 2(l) of the Registration Regulations.

12. Regulation 6(9)(iii) of the Registration Regulations.

13. Regulation 6(7)(ii) of the Registration Regulations.

14. Regulation 6(7)(iii) of the Registration Regulations.

15. Regulation 6(1) of the Registration Regulations.

16. Regulations 4 and 5 of the OC Regulations.

17. Regulation 14 of the OC Regulations.

18. IRDAI Order dated 9 February 2023 re Formation of Consultative Committee on Investments – available at (https://irdai.gov.in/document-detail?documentId=2555774) and last accessed at 1123 hours on 9 May 2023.

19. The 2 members of the Investments Committee from a private equity background are: (i) Renuka Ramnath, MD and CEO of Multiples Alternate Asset Management Pvt. Ltd.; and (ii) Rahul Garg, Partner of Premji Invest.

20. Irdai chief open to insuretechs, Times of India - 31 May 2022 – available at (https://timesofindia.indiatimes.com/business/india-business/irdai-chief-open-to-insuretechs/articleshow/91900030.cms) and last accessed at 1153 hours on 11 May 2023. See also Use technology to make insurance affordable, says Irdai chairman Panda, Business Standard – 30 August 2022 – available at (https://www.business-standard.com/article/economy-policy/use-technology-to-make-insurance-affordable-says-irdai-chairman-panda-122083001379_1.html) and last accessed at 1153 hours on 11 May 2023

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