by Ms Leena Chacko,
Partner, Cyril Aamarchand Mangaldas
After deliberation among stakeholders for almost a decade, the Insurance Laws (Amendment) Act, 2015 (Act) finally received legislative consent in March 2015. The Act permitted what successive governments had promised, Indian insurance companies could now have direct and indirect foreign holding of up to 49%. This however came with a caveat. The Act required these Indian insurance companies to be “Indian owned and controlled”.
Unlike other sectors, where foreign direct investment related guidelines are prescribed by the government directly, for the insurance sector, this power vests with the Insurance Regulatory and Development Authority of India (IRDAI). IRDAI’s interpretation of “ownership” and “control” would therefore determine the course of future foreign investments in Indian insurance companies.
Clarifying “ownership”
IRDAI did soon clarify the meaning of “ownership” by way of the Indian Insurance Companies (Foreign Investment) Rules, 2015. These Rules defined “ownership” as ownership of more than 50% of the equity capital of the Indian insurance company.
“Control” was already defined under the Act as the “right to appoint a majority of the directors or to control the management or policy decisions including by virtue of shareholding or management rights or shareholders agreements or voting agreements”. However, how this definition would be construed and implemented on the ground by IRDAI remained unclear, particularly given the divergence in how other sectoral regulators have interpreted “control”.
Foreign investors proposing to invest in Indian insurance joint ventures as well as Indian parties proposing to divest their shareholding sought IRDAI’s guidance on how “control” will be construed for insurance companies and particularly on the permitted scope of board/ shareholder level rights available to foreign investors.
Determining “control”
To bring clarity, the IRDAI issued the Guidelines on “Indian owned and controlled” on 19 October 2015 (Guidelines). The Guidelines prescribed the following principles for determining “control”:
• majority of directors (other than independent directors) on the board of insurance companies (“Board”) to be appointed by the Indian partner;
• key managerial persons, excluding chief executive officer (CEO), may be nominated by the foreign partner with approval from the Board. The CEO to be appointed by the Board or the Indian partner;
• chairman of the Board (if carrying a casting vote) to be nominated by the Indian partner;
• quorum for Board meetings to require presence of a majority of Indian directors. A requirement for foreign partner’s nominee to constitute quorum shall be valid so long as there is a similar requirement for presence of the Indian partner’s nominee; and
• control over “significant policies” of the insurance company to be exercised by the Board.
Interpreting “significant policies”
While the Guidelines did provide some clarity for foreign investors considering the shareholder rights that they can avail, the meaning of “significant policies” still remains subjective. In this context, it appears that the IRDAI has sought to further discuss affirmative voting rights of the foreign partner for management policy decisions, insurance products offered and appointment of actuaries.
It is relevant that while numerous Indian insurance companies have approached the IRDAI for the approval to raise foreign shareholding, each of these transactions is still being evaluated by the IRDAI as of November 2015. The approach taken by the IRDAI for these transactions is likely to provide guidance on interpretation of the term “significant policies” by the regulator. But for now, it is still wait and watch.