India Legislative Updates: The Insurance Sector

Francisco A. Laguna

 This week, TransLegal continues its 2015 series on recent legislative changes in India.  In light of Prime Minister Narendra Modi’s recent visit to Pakistan on the occasion of PM Nawaz Sharif’s birthday, this series is even more appropriate.  Today, we focus on issues related to ownership and control of insurance companies.

"IRDAI" by Swapna J BcomD - Own work. Licensed under CC BY-SA 4.0 via Wikimedia Commons

“IRDAI” by Swapna J BcomD – Own work. Licensed under CC BY-SA 4.0 via Wikimedia Commons

In April 2015, TransLegal wrote about the reforms to India’s insurance sector, including the near doubling of permitted foreign direct investment (26% to 49%), provided the Indian insurance company continued to be Indian owned and controlled.  In October 2015, the Insurance Regulatory and Development Authority (IRDA) issued guidelines which explain the concept of “Indian owned and controlled” for insurance companies.

The Indian Insurance Companies (Foreign Investment) Rules, 2015 defined: (a) Indian Ownership of an Indian Insurance company as “…more than 50% of the equity capital in it beneficially owned by resident Indian citizens or Indian companies, which are owned and controlled by resident Indian citizens…” (b) Indian Control of an Indian Insurance Company as “…Control of such Indian Insurance Company by resident Indian citizens or Indian companies, which are owned and controlled by resident Indian citizens…”

Section 2(7A) of the Insurance Laws (Amendment) Act, 2015 clarifies that control included the right to appoint a majority of the directors or to control the management or policy decisions by virtue of shareholding, management rights, shareholders’ agreement or voting rights.

The key requirements for an insurance company to qualify as Indian owned and controlled are:

  • Parliament of India Photo Credit: Wikimedia Commons

    Parliament of India
    Photo Credit: Wikimedia Commons

    Constitution of the Board: A majority of the directors (excluding independent directors) of the Indian insurance company must be nominated by the Indian promoter(s) and / or the Indian investor(s). If the Chairman of the board has a casting vote, such chairman must be a appointed by either the Indian promoter(s) and / or investor(s).

  • Qualifying Quorum at Board Meetings:  Indian directors are required to establish a valid quorum to conduct business. A nominee director representing the foreign investor(s) may be required for a valid quorum at the initial meeting to protect minority shareholder rights. If there is no quorum, subsequent meetings may be conducted following the Companies Act, 2013, which suggests special quorum rights will not be applicable.
  • Appointment of Key Managerial Personnel (KMPs): KMPs, including the chief executive officer, must be appointed by the Indian Board or by the Indian promoter(s) and, or, investor(s). The foreign investor can nominate KMPs (other than the CEO) but their appointment must be approved by an Indian Board.
  • Significant Policies: Control over significant policies must be exercised by an Indian Board. No definition of significant policies has been provided and the affirmative voting rights available to foreign investor(s) will need to be carefully reviewed.

The Guidelines require insurance company compliance by 19 January 2016. An extension for a maximum period of another 3 months can be sought by filing an application with IRDA, which it may grant at its discretion. Further, compliance is to be ensured through self-certification, including filing with the IRDA an undertaking from the CEO, resolution of the Board confirming compliance, copies of the joint venture agreements and amendments thereto.

The Prime Minister, Shri Narendra Modi addressing the gathering at the Indian Community Reception Event, at Singapore Expo, Singapore on November 24, 2015.

The Prime Minister, Shri Narendra Modi addressing the gathering at the Indian Community Reception Event, at Singapore Expo, Singapore on November 24, 2015.

Application to Insurance Intermediaries

The IRDA Act, 1999 defines insurance intermediaries as insurance brokers, reinsurance brokers, insurance consultants, surveyors and loss assessors.  These intermediaries must comply with the Guidelines if more than 50% of their revenue is from insurance activities.

The Guidelines are one of the first issued by India specifically requiring Indian control. They do, however, leave the interpretation of the criteria to the IRDA’s Chairperson.  As such, it will be  interesting to see how compliance and enforcement are approached and determined.

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