By Ms Leena Chacko, Partner and Mr Indranath Bishnu, Principal Associate, both from Amarchand & Mangaldas & Suresh A Shroff & Co Advocates and Solicitors
The Indian insurance sector was liberalised in 2000 which allowed private players to operate in the insurance sector for the first time and allowed foreign direct investment (“FDI”) of up to 26%.
This incentivised the entry of new players, often in tie-ups with existing Indian banks which resulted in double-digit growth rates in the sector over the last decade. However, proposals made in the Insurance Laws (Amendment) Bill, 2008, to increase the FDI limit from 26% to 49% were rejected in the Indian parliament, belying industry expectations. But the past few months have seen some important developments in this sector.
IPO norms and divestment by promoters
The Insurance Act, 1938 (the “Act”) requires Indian promoters holding in excess of 26% of the paid-up equity capital of an Indian insurance company (“Insurance Co”) to divest such excess share capital in a phased manner after 10 years of commencement of business of the Insurance Co.
In a circular dated 24 August 2011, the government clarified that Indian promoters can divest their excess shareholding even prior to the completion of the ten-year period. Although comprehensive rules for phased divestment after 10 years are not yet in place, the Insurance Regulatory Development Authority (“IRDA”) has recently issued the IRDA (Issuance of Capital by Life Insurance Companies) Regulations, 2011 (“IPO Regulations”). This prescribes public issuance norms for life insurance companies that have completed 10 years from the commencement of business. The IPO Regulations are applicable to the divestment of equity by one or more Indian promoters as well as for public issues by life insurance companies. Any issue of capital other than for such purposes shall require specific approval of the IRDA.
The IPO Regulations prescribe that a public issue shall be with the approval of the IRDA and broadly sets out the criteria that the IRDA shall appraise in granting its approval. One important factor considered by the IRDA is that the embedded value of the Insurance Co be evaluated by an independent actuarial expert. IRDA expects such value to be twice the paid up equity capital of that Insurance Co. Further, the IRDA may set out conditions for a public issue, including the extent to which promoters may dilute their respective shareholding, maximum subscription to be allotted to foreign investors and a lock-in period for promoters. The procedure and disclosure requirements for such public issues are to be regulated in terms of the general regulations for this purpose, issued by the Securities and Exchange Board of India, the capital markets regulator. The IPO Regulations may prescribe additional disclosures that are required to be made in the offer documents/prospectus by insurance companies.
The timing of the IPO Regulations is significant since numerous life insurance companies are nearing a decade of operation after the liberalisation of the sector. However, given global market sentiments, it is yet unclear whether there will be immediate public issuances by insurance companies to the IPO Regulations.
Draft bancassurance norms
Bancassurance has emerged as an important distribution channel for insurance products in India. The IRDA released a draft of the proposed IRDA (Licensing of Bancassurance Agents) Regulations, 2011 (the “Draft Regulations”) applicable to banks and non-banking financial companies proposing to act as bancassurance agents (“Banks”) on 23 November 2011.
The Draft Regulations propose to limit the direct and indirect remuneration paid to Banks by Insurance Cos (including by issuance of shares at less than market value) and the same has now to be amortized towards remuneration to the Bank. The Draft Regulations also propose to limit the number of tie-ups between individual Banks and insurance agents. These proposals have met with resistance in the industry and especially from banks holding stakes in insurance joint ventures. Consultation process between IRDA and various stakeholders on the Draft Regulations are currently underway and the regulator is expected to finalise these norms soon.