Co-authored by Shubhangi Pathak, Partner and Madhulika Iyer, Associate
In furtherance of the recently notified IRDAI (Registration of Indian Insurance Companies) Regulations, 2022 (“Registration Regulations”), the Insurance Regulatory and Development Authority of India (“IRDAI”) has also notified the Master Circular on Registration of Indian Insurance Company, 2023 on 24th April 2023 (“Master Circular”), with an aim to promote the insurance sector’s growth by simplifying the process of registration of Indian insurance companies, ease of doing business, and keeping in mind the increase in the foreign direct investment limit in Indian insurance companies.
The Registration Regulations repeal the IRDAI (Registration of Indian Insurance Companies) Regulations, 2000 and the IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations, 2015, and now consolidate various guidelines and circulars relating to the registration of Indian insurance companies (“Insurer”) and set out the norms for investment by Private Equity Funds (“PE Fund”) and other investors in Indian Insurers. The recently notified Master Circular further lays down the procedural aspects regarding registration as an Insurer and transfer of shares and also provides clarification on certain aspects. The Master Circular has also now repealed the IRDAI (Investment by PE Funds in Indian Insurance Companies) Guidelines, 2017 (“PE Guidelines”).
Investment by PE funds in an Indian Insurer – SPV Route Optional
The erstwhile PE Guidelines defined a PE Fund as alternative investment funds registered with the Securities and Exchange Board of India, or a fund specifically formed for investment in one or more entities by one or more persons and included domestic and foreign PE Funds. The Registration Regulations have further widened this definition to also include (i) investment funds, or its manager registered for the purpose of investment, with the International Financial Services Centres Authority (IFSCA); and (ii) funds specifically formed for investment, which are registered or subject to the condition that their manager is registered with any financial sector regulator in any Financial Action Task Force (FATF) compliant jurisdiction.
A PE Fund may invest in an Indian insurance company in the capacity of an investor or a promoter, which is further bifurcated into four sub-categories being (i) Indian investors, (ii) foreign investors, (iii) Indian promoters and (iv) foreign promoters. The category of foreign promoters has specifically been introduced pursuant to the increase in the foreign direct investment limit from 49% to 74%.
In order to invest in an Indian insurance company as a promoter, a PE Fund has to satisfy the fit and proper criteria set out under the Registration Regulations, and additionally fulfil the following criteria: (i) the manager of the PE Fund or its parent fund has completed 10 (ten) years of operation; (ii) the funds raised by the PE Fund, including its group entity/equities, is USD 500 million (US Dollars five hundred million) or more (or its equivalent in INR); (iii) the investible funds available with the PE Fund is not less than USD 100 million (US Dollars one hundred million); and (iv) the PE Fund manager has invested in the financial sector in India or other jurisdictions.
Post the notification of the Registration Regulations, there were certain conflicting positions between the PE Guidelines and the Registration Regulations. The position has now been clarified pursuant to the Master Circular which has repealed the PE Guidelines.
The mandatory requirement for a PE Fund to invest in an Insurer in the capacity of a promoter only through a special purpose vehicle (“SPV”), a requirement per the PE Guidelines is not applicable any longer – a move welcomed by the industry. Hence, it appears that now PE Funds may invest in an Indian insurance company in the capacity of a promoter or an investor, either directly or through an SPV. In the event that a PE Fund still desires to invest through an SPV, it may do so, in compliance with the conditions laid down in Regulation 6(3) of the Registration Regulations, which includes: (i) the SPV shall not issue convertible instruments; (ii) no stock options/sweat equity shares shall be issued to the employees or directors of SPV; (iii) prior approval of the IRDAI would be required for transfer of shares of SPV; (iv) the investment limits, lock-in period and other requirements shall be applicable at the SPV level; (v) the equity shares to be issued by the SPV shall be valued by two SEBI registered Category-I merchant bankers; (vi) the paid-up capital of the SPV shall be equal to or more than the minimum paid up capital of the applicant, and (vii) the criteria specified in Regulation 5(2)(iii) wherein the IRDAI shall, inter alia, take into account the conduct, track record and performance of the promoters, investors, and directors shall also be applicable for a promoter and investor of the SPV.
Promoter Holding and Lock-in Obligations
Under the Registration Regulations, the erstwhile requirement for an investment over 10% of the paid-up capital of the Insurer to be mandatorily made by a promoter has now been increased to 25% of the Insurer’s paid-up capital, for investments by a single investor.
The PE Guidelines prescribed a lock-in requirement for 5 (five) years on the SPV and shareholders of the SPV for investments exceeding 10%. The Registration Regulations now prescribe lock-in requirements for promoters and investors as: (i) investments made by a ‘promoter’ or an ‘investor’ will be locked in for a period of 5 (five) years from the time of or before grant of the certificate of registration (“R3”); (ii) for investments made during a period of 5 (five) years post the date of registration, a lock-in for 5 (five) years from the date of investment or 8 (eight) years from R3 whichever is earlier, will be applied; (iii) during the period between 5 (five) years to 10 (ten) years from R3; investment by a ‘promoter’ will be locked-in for 3 (three) years from the date of investment or 12 (twelve) years from R3, whichever is earlier, and investment by an ‘investor’ will be locked-in for 2 (two) years from the date of investment or 11 (eleven) years from the date of registration, whichever is earlier, and (iv) after 10 (ten) years from R3, investments by a promoter will be locked-in for 2 (two) years, and investments by an investor will be locked-in for 1 (one) year.
The Master Circular provides for the registration requirements for the Insurer pursuant to the Registration Regulations, including, accompanying of resolutions passed by board of promoters and board of applicants for entering into the insurance business and appointing authorized persons on behalf of promoter and applicant while applying through the newly prescribed form for IRDAI/R1 approval. Part VIII of the Master Circular further lays down certain transitory provisions and clarifications regarding (i) registration of the Insurers, whereby the validity of the NOCs issued prior to the notification of the Registration Regulations, and R1 forms has been clarified, including the processing fee for R1 forms filed and/or processed before the date of notification of Registration Regulation and (ii) the transfer of shares whereby applicants seeking transfer of shares prior to the Registration Regulations shall not be subject to the processing fee, and lock-in requirements in case of approvals granted prior to notification of Registration Regulations.
Further, Regulation 6(1) of the Registration Regulations provides that the IRDAI may relax the lock-in period to enable the Insurer to list its shares on the stock exchange(s) in India. In order to remove any difficulties faced by the Insurers, the Master Circular has now clarified that the lock-in specified in the Registration Regulations shall not be applicable on the Insurers having its equity shares listed on the stock exchange(s) in India. However, the Insurer shall comply with the regulations regarding minimum promoter(s) holding.
A welcome relief
The Registration Regulations and the Master Circular are a welcome change for the Indian insurance industry which is currently a favoured sector for investors (both Indian and foreign), especially PE Funds. The last few years have witnessed development of the insurance sector and also evolution of structuring of investments in the sector. The PE Guidelines were released by a IRDAI to set out certain norms for regulating such structures.
Through the Registration Regulations the regulator has consolidated the relevant principles guiding structuring of investments into the insurance sector and also introduced certain new concepts, such as the eligibility criteria for PE Funds to be promoters of an Insurer. Further, the Registration Regulations now appear to extend all the significant norms applicable to investments being made directly into an Insurer to investments being made in Insurers through a SPV (holding company) as well. It remains to be seen whether potential investors will still adopt the SPV structure as a preferred route for investing in Indian insurance companies or will the recent regulatory changes equalise all prevalent structures.