The insurance sector in India is highly regulated. The Insurance Act, 1938, as amended (the "Insurance Act") and other rules, regulations, notifications and guidelines notified by the Insurance Regulatory and Development Authority of India ("IRDAI") regulate, promote and ensure orderly growth of the insurance industry in India.
The Government of India recently liberalised its policy on foreign investment in the insurance sector, permitting foreign direct investment up to 49% of the paid-up capital of an Indian insurance company under the automatic route. With a view to further capital raising from the public markets by insurance companies, the IRDAI notified the IRDAI (Issuance of Capital by Indian Insurance Companies Transacting Life Insurance Business) Regulation, 2015 ("IRDAI Issuance of Capital by Life Insurance Companies Regulations") and IRDAI (Issuance of Capital by Indian Insurance Companies Transacting other than Life Insurance Business) Regulation, 2015 ("IRDAI Issuance of Capital by other than Life Insurance Companies Regulations" and together with IRDAI Issuance by Life Insurance Companies Regulations, as "IRDAI Issuance of Capital Regulations"). The IRDAI Issuance of Capital Regulations prescribe conditions applicable to and manner and procedure to be followed by an Indian insurance company proposing an initial public offering ("IPO"), which are required to be complied with in addition to other applicable laws including the Companies Act, 2013, as amended and the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended ("SEBI ICDR Regulations").
This note seeks to briefly examine and highlight some of the key regulatory requirements and issues that need to be considered in the context of IPOs by Indian insurance companies, from an Indian law perspective. There may be additional issues to be considered from an international law perspective, which should be discussed with U.S. counsels.
What are the eligibility requirements?
In addition to compliance with the eligibility requirements set out under the SEBI ICDR Regulations, insurance companies are required to fulfil any lock-in requirements imposed on the promoters or investors of the company under the certificate of registration issued by IRDAI. Further, the IRDAI Issuance of Capital Regulations require that certain approvals be obtained from the IRDAI in connection with the IPO, details of which are briefly set out below.
Will an approval from the IRDAI for the IPO be required and what are the key points relating to such approval?
The IRDAI Issuance of Capital Regulations require insurance companies to obtain an approval from the IRDAI, prior to filing the draft red herring prospectus ("DRHP") with the Securities and Exchange Board of India ("SEBI"), with respect to an IPO, whether involving a fresh issue of shares or an offer for sale by existing shareholders, or a combination of the two.
Parameters for granting the approval: The application for obtaining such approval is required to be made in a prescribed form, containing specific details in relation to certain prescribed parameters, based on which IRDAI will make its evaluation for granting the approval. Such parameters include the insurance company's overall financial position, its regulatory record, purposes for which capital is proposed to be raised and whether the company will be "Indian owned and controlled" post-IPO. Additionally, a life insurance company must submit an embedded value report prepared by an independent actuary, either along with the application or separately, at least 30 days prior to the filing of the DRHP.
Time period for grant of approval: Although the IRDAI Issuance of Capital Regulations require IRDAI to grant the approval expeditiously, there is no prescribed time period within which the IRDAI is obligated to grant or reject an application seeking such approval. Accordingly, while determining timelines for the IPO, sufficient lead time should be factored in for obtaining this approval.
Validity of approval: Once granted, the approval of IRDAI will be valid for a period of one year, within which the insurance company is required to file the DRHP with SEBI. A further extension of six months may be granted by the IRDAI, at its discretion, upon a written request from the company.
What are the additional approvals that may be required for acquisition or sale of shares of an insurance company through an IPO?
In terms of the IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations, 2015 ("IRDAI Transfer Regulations"), any acquisition of shares of an insurance company exceeding 5% of its paid-up share capital requires prior approval from the IRDAI. In addition, prior IRDAI approval is also required for any sale of shares where the nominal value of the shares proposed to be transferred by person(s) under the same management, jointly or severally, exceeds 1% of the paid-up equity capital of the company.
Accordingly, depending on the size and structure of the IPO, if (i) an existing shareholder (together with any other selling shareholder(s) under the same management) proposes to offer more than 1% of the company's paid-up equity capital through an offer for sale component; and/or (ii) there is a likelihood that any investor (in particular anchor investors and other qualified institutional buyers) may, post-IPO, hold more than 5% of the paid-up share capital of an insurance company, prior approval of the IRDAI must be sought by including specific details in this regard in the application for approval of the IPO to be filed with the IRDAI in any event (as mentioned in response to the immediately preceding query).
What are the additional conditions that IRDAI can prescribe while granting its approval for the IPO?
Pursuant to the IRDAI Issuance of Capital Regulations, IRDAI may, while granting its approval for the IPO, impose certain conditions, including the following:
- restrictions on dilution of shareholding by promoters or investors;
- prescribing limits for allotment of shares to any class of foreign investors;
- minimum lock-in period for the promoters or investors, without prejudice to the lockin requirements under the SEBI ICDR Regulations;
- modification in the articles of association of the insurance company to explicitly provide for no registration of transfer beyond specified limits without the approval of IRDAI; and/or
- additional disclosure requirements, including specific risk factors, financial and operating information and industry related data.
What can the net proceeds of an IPO be used for?
In terms of the IRDAI Issuance of Capital Regulations, it is likely that the IRDAI, while granting its approval for the IPO, prescribes specific objects for which the proceeds of the IPO can be utilised, including for the augmenting the solvency requirements, general corporate purposes, or any other purpose which has the specific approval of the IRDAI.
Further, under the General Insurance Business (Nationalisation) Act, 1972, as amended, public sector insurance companies, i.e. the General Insurance Corporation, the National Insurance Company Limited, the New India Assurance Company Limited, the Oriental Insurance Company Limited and the United India Insurance Company Limited ("Insurance PSUs"), are permitted raise capital for (i) increasing their business in rural and social sectors; (ii) meeting solvency margins; or (iii) other purposes as approved by the Central Government. Accordingly, if the Insurance PSUs propose to utilise proceeds of an IPO for purposes other than those specified in (i) and (ii) above, prior approval of the Central Government will be required.
Are there any additional disclosure requirements or other issues with respect to financial information?
As a part of the disclosure requirements that may be prescribed by IRDAI while granting approval under the IDRAI Issuance of Capital Regulations, the IRDAI may require insurance companies to disclose financial statements in specific formats prescribed by the IRDAI. The preparation of financial statements by an insurance company is governed by IRDAI (Preparation of Financial Statements and Auditor's Report of Insurance Companies) Regulations, 2000, as amended, which prescribes accounting principles, disclosures requirements and formats for preparation of financial statements.
Given that the SEBI ICDR Regulations also prescribe formats for presentation of restated financial information to be included in offer documents, the formats provided by the two regulatory authorities will have to be harmonised. In the event of a conflict, it would be advisable to seek clarifications from SEBI in this regard.
Additionally, the IRDAI may also require disclosure of certain sector-specific financial ratios and operational information in the IPO related offer documents.
Adoption of Indian Accounting Standards ("Ind(AS)")
In February 2015, the Ministry of Corporate Affairs ("MCA") notified the Companies (Indian Accounting Standards) Rules, 2015 and in terms of the press release issued by the MCA on January 18, 2016, followed by a circular issued by the IRDAI on March 1, 2016 ("IRDAI Ind(AS) Circular"), insurance companies are required to prepare their financial statements in accordance with Ind(AS) for accounting periods commencing on April 1, 2018 (with comparatives for the period ending on March 31, 2018). Insurance companies are not permitted to adopt Ind(AS) earlier than this timeline (except that an insurance company can provide Ind(AS) compliant financial data to its parent company or any other investor company for the purpose of preparation of consolidated financial statements of and by such parent company/ investor company). However, given that implementation of Ind(AS) is expected to significantly impact financial reporting systems and processes of insurance companies, in terms of the IRDAI Ind(AS) Circular, insurance companies are required to undertake various steps towards the implementation process, including setting up a steering committee and quarterly reporting to the board of directors by the audit committee. In addition, effective from the quarter ending December 2016, insurance companies are required to submit proforma Ind(AS) financials with the IRDAI.
Accordingly, for any insurance company undertaking an IPO prior to when its Ind(AS) compliant financial statements become available (i.e. after April 1, 2018), Ind(AS) financials cannot be included. This may not be in keeping with the practice proposed to be followed by issuer companies in other sectors, where Ind(AS) compliant financial statements may voluntarily be included in offer documents with a view to provide investors with all material information relevant for them to take an informed decision to invest in the IPO.
What are the restrictions or ceilings on holding shares in an insurance company?
Foreign investment in an insurance company (including portfolio investment) is currently permitted up to 49% of the paid-up capital of the insurance company under the automatic route.
An 'Indian Investor', being any person eligible to invest in an insurance company, is not permitted to hold more 10% of its paid-up equity share capital and such Indian Investors are collectively not permitted to hold more than 25% of its paid-up equity share capital.
Further, the Central Government is required to mandatorily hold 51% in all Insurance PSUs at all times.
Accordingly, the abovementioned thresholds of shareholding in insurance companies will be required to be adhered to while determining allocation of shares pursuant to an IPO and appropriate disclosures in this regard should be included in offer documents.
How will "Promoter(s)" of an insurance company be identified?
The definition of "Promoter" prescribed under the SEBI ICDR Regulations differs from the definition of an "Indian promoter" as prescribed under the IRDAI (Registration of Indian Insurance Companies) Regulations, 2000, as amended.
The IRDAI Issuance of Capital Regulations provide that for the purposes of naming persons as "Promoters" in an offer document to be filed with SEBI, the definition prescribed under the SEBI ICDR Regulations should be followed (which essentially follows a test based on control). However, SEBI has, in the past, gone beyond such definition and expressed the view that any person named as a "promoter" for the purposes of any other regulations should also be named as a promoter for the purposes of the SEBI ICDR Regulations. For instance, SEBI has, in relation to YES Bank Limited's IPO, ordered that Rabobank International Holding B.V., which was named as a co-promoter by YES Bank Limited in its application to the Reserve Bank of India for grant of a banking license, should have been named as a promoter by YES Bank in its IPO related offer documents.
Given this background, in the event that the persons identified as "Indian Promoters" of an insurance company for IRDAI's purposes do not fulfil SEBI's definition of "Promoters" and are consequently not proposed to be named as "Promoters" in the IPO related offer documents, it may be advisable that this issue be discussed with SEBI prior to filing of the DRHP.
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.