October 21, 2015
Finally, clarity on ownership and control for insurance firms looking to raise funds from abroad. The Insurance Laws (Amendment) Act, 2015, passed during Parliament’s budget session, allowed insurance companies to raise their foreign ownership from 26% to 49%, with the requirement that the company be Indian owned and controlled.
The industry, however, waited for further clarification. It came on 19 October with the Insurance Regulatory and Development Authority of India (Irda) announcing guidelines. The insurance regulator said the expression “control” includes the right to appoint a majority of the directors or control the management or policy decisions, including by virtue of their shareholding or management rights or shareholders’ agreement or voting agreements. This means the majority of directors, excluding independent directors, will have to be nominated by Indian promoters or Indian investors. According to the guidelines, even the appointment of key management persons that include chief executive officer, managing director or principal officer in case of an insurance broker will have to be through them or the board of directors.
The guidelines, however, allow for the nomination of key persons except the chief executive officer by foreign investors, provided such appointments are approved by the board, which must have a majority of directors that are the nominees of Indian promoters or investors. The guidelines are also applicable to insurance intermediaries such as brokers and third- party administrators. However, in case an insurance intermediary has more than 50% of its revenue from non-insurance activities, these guidelines are not applicable. The guidelines further state that wherever the chairman of the board has a casting vote, the chairman will be nominated by Indian promoters or Indian investors. “Now that Irda has clarified the management controls, the process of approving foreign direct investment (FDI) hike will be quick,” said Anuraag Sunder, director, insurance, PwC India. “FDI hike has to be approved by the Foreign Investment Promotion Board (FIPB) first, then the Competition Commission of India (CCI) and, ultimately, Irda. Given that all the insurers have three months to comply with the definition, most of the FDI hike requests that come will have an Indian owned and controlled management already in place.
This will help the authorities approve the FDI hike faster,” Sunder said. According to Sunder, when the sector opened up to private insurers, Indian promoters didn’t have the expertise to run the insurance business. “As a result, the management control automatically went to the foreign partners and still continues to be the case. Irda wants that to stop and make Indian shareholders more responsible. Now, regardless of the hike, management needs to be Indian owned and controlled. This means that management control will no longer be a deciding factor for the foreign promoters to hike their stake and many would want to increase the stake for a fair valuation,” added Sunder.