A flourishing insurance sector is crucial in a developing economy like India. The sector has been in the limelight in recent years – first due to the raising of the foreign investment cap from 26% to 49% and recently due to the surge in listing of insurance companies.
Until two years ago, when the archaic Insurance Act, 1938, was overhauled by the much awaited Insurance Laws (Amendment) Act, 2015, promoters had limited ability to realize their investments. Indian promoters were required to divest shareholding in excess of 26% after 10 years from the commencement of business, in the manner prescribed by the Insurance Regulatory and Development Authority of India (IRDAI). However, this requirement remained dormant as the IRDAI did not prescribe the manner for such divestment until a few years before the amendment to the 1938 statute, which omitted the statutory divestment requirement. The IRDAI issued regulations providing for life insurance and general insurance companies to list shares in 2011 and 2013 respectively.
From the perspective of regulatory development, 2015 was a good year. The Insurance Act amendments included allowing foreign investment up to 49% and opening by foreign reinsurers of branch offices in India. The IRDAI also notified two sets of regulations: the IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations, 2015, permitting “investors” (defined to exclude foreign investors) to hold up to 10% of the aggregate shareholding of an insurance company and permitting insurance companies to have investors’ holdings up to 25% of the total capital (i.e. through multiple investors); and the IRDAI (Other Forms of Capital) Regulations, 2015, permitting issuance of capital in forms other than equity shares carrying uniform voting and economic rights.
Before the regulations on transfer of equity shares, the IRDAI regulations did not distinguish between an investor and a promoter. All liabilities and obligations of a “promoter” of an insurance company applied to all shareholders. The ability of insurance companies to obtain financial investments (other than from the promoters) was therefore limited. The burden of meeting the prescribed solvency margins and providing capital rested solely with the promoters.
Although the recognition of “investors” as a distinct class of shareholders was ground-breaking, attracting and obtaining financial assistance continues to be a challenge for emerging insurance companies, leaving the potential for private M&A in this sector untapped.
The IRDAI has recently notified the IRDAI (Investment by Private Equity Funds in Indian Insurance Companies) Guidelines, 2017. Before the issue of the guidelines, IRDAI’s position on the ability of private equity (PE) funds to invest in insurance companies was unclear. Investors were hesitant to make substantial investments in the sector due to the ambiguity. However, as a welcome relief, the guidelines clarify the requirements for investment by Indian private equity funds in the insurance sector including a five-year lock-in period for PE funds classified as “promoters” and no lock-in period for shareholding below 10%.
Some challenges however subsist. The 10% individual cap and 25% aggregate cap on holdings (in the capacity of an investor) may continue to limit the ability of insurance companies to attract funding. Further, the IRDAI has wide discretionary powers when considering an application and granting approval for transfer of shares of an insurance company, including the ability to impose conditions that it deems appropriate, such as capital commitment requirements.
The guidelines require the “promoters” at the time of the investment to retain their shareholding. This may result in multiple parties being classified as promoters from an IRDAI perspective. It is also notable that although the relevant IRDAI regulations refer to the Securities and Exchange Board of India (SEBI) regulations for the definition and scope of persons to be named as “promoters” for the purposes of an IPO, the possibility of SEBI requiring persons designated as promoters under the IRDAI regulations to be named as promoters for the IPO cannot be ruled out.
As regards the possibility to list shares, the IRDAI appears to be supportive. It has even expressed its intent to require listing for general and life insurance companies which have completed eight and 10 years respectively.
A fine balance between enabling provisions and mandatory requirements however is yet to be achieved.
Roopal Kulsrestha is a partner at Shardul Amarchand Mangaldas & Co. The views and opinions expressed are solely those of the author and do not necessarily reflect the official view or position of the firm.
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