Investing in the Insurance Sector

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Insurance in India is a thriving industry in India with both national and international players competing and developing at a rapid rate. Along with banking and real estate, it constitutes 12.9% of India’s GDP.[1] Despite undergoing transformational changes since its liberalization in 2001, the Insurance sector has seen the entry of some of the largest insurance companies in the world.[2] In 2015, the Foreign Direct Investment (“FDI”) limit in the insurance sector got increased from 20% to 49% under the automatic route.[3] Non-Banking Financial Institutions (“NBFC”) and Banks have entered into the insurance industry. New investor categories such as Alternative Investment Funds (“AIF”), Foreign Portfolio Investors (“FPI”) are permitted to invest under the regulation of the Insurance Regulatory and Development Board of India (“IRDAI”). This piece highlights and analyzes the above developments pertaining to the regulations on investment inflows to the Insurance Sector.

Entry of NBFC into Insurance Sector

A Non-Banking Financial Company (“NBFC”) is a company engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.[4] When a registered company’s financial assets constitute more than 50% of the total assets and its income from financial assets constitutes more than 50%, it can be registered with RBI as an NBFC. Though RBI has supervisory and regulatory oversight on NBFCs, an Insurance company holding a valid IRDAI issued Registration Certificate are regulated by IRDAI. (*for a better understanding of NBFCs check Concept Page of the Blog at http://thesecuritiesblawg.in/concepts/)

The Reserve Bank of India (“RBI”) permitted the Entry of NBFCs into the Insurance Sector wherein it has prescribed conditions which need to be met with to undertake such business in following circumstances

NBFC to carry on business as an agent of Insurance companies

In order for an NBFC to undertake insurance business as an agent of insurance companies on fee basis without risk participation, it should have a minimum net owned fund of Rs. 2 Crore

NBFC investment in Insurance

For an NBFC to invest in the Insurance sector, its owned fund has to be more than Rs. 500 Crore, Capital to Risk-weighted Assets Ratio (“CRAR”) of NBFC engaged in loan investment activities holding public deposits should not be less than 15% and for other NBFCs at 12% irrespective of their holding public deposits (or not). The level of net non-performing assets (“NPA”) should be more than 5% of the total outstanding leased/hire purchase assets and advances taken together. The NBFC should have a net profit for past three continuous years and the track records of its subsidiaries (if any) should be satisfactory. The regulatory compliance for servicing public deposits, if held.

NBFCs registered with RBI which are not eligible as joint venture participant, as above can make investments up to 10 per cent of the owned fund of the NBFC or Rs.50 crore, whichever is lower, in the insurance company. In this case, the CRAR cannot exceed 12% if it is engaged in equipment leasing/hire purchase finance activities and 15 per cent if it is a loan or investment company.

Conducting Business Departmentally

An NBFC is not permitted to conduct business departmentally (even through subsidiary or company in the same group of an NBFC)

*All of the above investments and other activities by NBFCs require prior approval from the RBI

* Compliance with Section 6AA of the Amended Insurance Act is mandatory

NBFCs conducting insurance agency business

The RBI vide Circular[5] dated February 10, 2004 laid down that NBFCs registered with it may take up insurance agency business on fee basis and without risk participation of RBI subject to it being compliant to IRDAI Regulations for acting as ‘composite corporate agent’ with insurance companies and that it does not adopt any restrictive practice of forcing its customers to go in only for a particular insurance company in respect of assets financed by NBFC. As the participation by an NBFC’s customer in insurance products is purely on a voluntary basis, it should be stated in all distributed publicity material. There cannot be a direct or indirect linkage between the provision of financial services offered by the NBFC to its customers and use of insurance products. Finally premium is to be paid by the insured directly to the insurance company without running through the NBFC and the risk, if any, involved in insurance agency should get transferred to the business of the NBFC.

[For NBFCs, the foreign equity investment caps applicable in that sector shall continue to apply, subject to the condition that the revenues of such entities from their primary (i.e. non-insurance related) business must remain above 50% of their total revenues in any financial year.][6]

Entry of Banks into the Insurance business

The Reserve Bank of India vides Circular[7] permitted banks to set up insurance joint ventures on risk participation basis as also to conduct agency business and referral activities.[8] Vide another Circular dated January 15, 2015[9], RBI eased the entry of Banks into the sector.

It is now established that Banks may undertake insurance business by setting up a subsidiary/joint venture, as well as undertake insurance broking/ insurance agency/either departmentally or through a subsidiary either under the corporate agency or broking model subject to compliance of IRDA (Licensing of Corporate Agents) Regulations, 2002 or IRDA (Licensing of Banks as Insurance Brokers) Regulation, 2013 as also the code of conduct prescribed by IRDA. These banks would also have to ensure customer appropriateness and suitability requirements.

Banks are only allowed to undertake insurance business through a subsidiary or JV set up for the purpose and in this regard, such bank should have a minimum net worth of Rs. 1000 Crore, CRAR of not less than 10%, NPA level of not more than 3%. The bank would also have to show a net profit for last three continuous years and a satisfactory track record of itself and subsidiary.

Unlike NBFCs, banks are permitted to undertake corporate agency functions or broking functions and referral functions departmentally. In case of a private bank promoted insurance company (an insurance company owned by a bank) any foreign direct investment in the bank requires the approval of the Reserve Bank of India in consultation with the IRDA.[10]

Insurance Regulatory and Development Authority of India (Investment by Private Equity Fund or Alternate Investment Fund in Indian Insurance Companies) Guidelines, 2017[11] being applicable to unlisted Indian Insurance Companies (“IIC”) and to private equity funds[12](“PE Fund”) who have invested in the unlisted Indian Insurance companies either as investor or as a promoter lay down that PE Funds can invest directly in IICs in capacity of investors subject to various investment conditions[13] such as firstly, Investment shall be as per the fund’s strategy reflected in placement memorandum to its investors; secondly, maximum shareholding by the fund not more than 10%of the paid up equity share capital of Insurance Company; third all Indian investors including investment by PE Fund(s) jointly can hold not more than 25% of paid-up equity share capital of the insurance company; fourthly, the minimum shareholding by promoter/promoter group shall at all times be maintained at 50% of paid-up equity capital of the insurer. However, where the present holding of promoters is below 50%, such holding shall be the minimum holding; fifthly, an undertaking is to be given by the PE Fund to not to create any encumbrance on or leverage the investment and finally, in case the investment is one time, then the PE Fund shall make an upfront disclosure to this effect.

While a PE Fund is not permitted to directly invest as a promoter in an IIC, it can do so through a Special Purpose Vehicle (“SPV”) subject to

  • PE fund through an SPV shall not be a promoter for more than one life insurer, general insurer, health insurer and reinsurer;
  • The scheme has to be filed with SEBI in accordance to applicable SEBI regulations;
  • Investment shall follow the Fund’s strategy as mentioned in the placement memorandum and entirely out of own funds (not from borrowed funds);
  • Investment memorandum or charter documents of the investor or the vehicle as the case may be must permit the investment to be made in the least up to the proposed limits including in respect of future capital requirements of the insurance company;
  • A similar undertaking is signed with regard to encumbrance on or leverage the investment made through borrowings; the investments made shall be subject to a lock-in period of five years (applicable on both the SPV as also the shareholders of SPV);[14]
  • Prior approval of the Authority be taken before bringing in any new shareholder(s) in SPV by the fresh issuance of shares beyond twenty-five per cent;
  • Minimum shareholding by promoters/ promoter group has to be maintained at fifty per cent of the paid up equity capital of the insurer;
  • Compliance by the insurer of Guidelines on “Indian owned and controlled” issued by IRDAI;
  • Maintain that at least one-third of directors on the Board of Insurance company are independent directors;
  • An undertaking to subscribe to the rights issue of the insurance company to ensure the same is not cash-strapped, and an undertaking of post-lock-in period disinvestment plan is to be submitted.

These Guidelines require the SPV to be Fit and Proper which requires the same to have a decent track record and no serious proceedings against them of criminal nature or on the lines of FUTP.

As per the Indian Investment Companies (Foreign Investment) Rules 2015, no IIC shall allow aggregate holding by way of total foreign investment[15] in equity shares by FI including FPI to exceed 49% of the paid up equity capital of such IIC. The IIC must ensure that its ownership and control remain at all times in the hands of resident Indian entities. FDI proposals up to 49 per cent of the total paid up equity of the IIC shall be allowed on the automatic route. Pricing guidelines specified by the Reserve Bank of India under FEMA are applicable.

Foreign Direct Investment in Insurance

Foreign Investment is permitted through automatic route up to 49% of paid-up equity capital of an Indian Insurance Company subject to IRDAI verification and compliance of Insurance Act, 1938 and the acquisition of a necessary license from the Authority for undertaking its insurance Activities. An Indian Insurance Company must ensure that its ownership and control remains at all-times in the hands of resident Indian entities referred to in Notification No. G.S.R. 115 (E) dated 19th February 2015.

Indian Investment Companies (Foreign Investment) Rules 2015 state that FDI includes investment by Non-Resident Indians, Persons Resident Outside India and other entities under Reg. 5(1) of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 (“TISPRO”) and also investment by FVCI as permissible under 6 of TISPRO. Indian ownership of an Indian Insurance Company means more than 50 % of the equity capital in its beneficially owned by resident Indian citizens or Indian companies, which are owned and controlled by resident Indian citizens. Foreign Portfolio Investment is permitted in an IIC subject to Regulation 5 of TISPRO. Pricing guidelines prescribed by RBI under TISPRO are applicable.

The Cap is applicable in same terms above to Insurance brokers, Third party administrators, surveyors and loss assessors and other insurance intermediaries appointed under the provisions of the IRDAI.

Comments

The Government is considering completely opening up the Insurance Sector for FDI under the automatic route citing need to de-link the gap in insurance intermediaries and insurance companies.[16] There is a need to strengthen the sector, it being an attractive FDI destination.

[1] Hasan A (2015) Impact Analysis of FDI on Insurance Sector in India. Int J Econ Manag Sci 4:255. doc:10.4172/21626359.1000255.

[2] Ibid.

[3] The Government of India liberalized its Foreign Direct Investment policy on Insurance Sector vide Press Note No. 1(2016) Series issued under the aegis of Ministry of Commerce and Industry (Department of Industrial Policy and Promotion) by amending the Consolidated FDI Policy Circular 2015.

[4] https://www.rbi.org.in/nbfcfaqs

[5] Entry of NBFCs into Insurance Business https://rbi.org.in/Scripts/BS_NBFCNotificationView.aspx?Id=1481.

[6] Consolidated FDI Policy (http://dipp.nic.in/sites/default/files/CFPC_2017_FINAL_RELEASED_28.8.17.pdf).

[7] RBI Circular DBOD.No.FSC.BC.16/24.01.018/2000-2001 dated August 9, 2000.

[8] Entry of Banks into Insurance Business https://rbi.org.in/scripts/NotificationUser.aspx?Id=235&Mode=0.

[9] RBI Circular No. DBR.No.FSD.BC.62/24.01.018/2014-15 dated January 15, 2015.

[10] http://www.nortonrosefulbright.com/knowledge/publications/163131/insurance-regulation-in-india.

[11] https://www.lifeinscouncil.org/component/IRDAI%20(Investment%20by%20Private%20Equity%20Funds%20in%20Indian%20Insurance%20Companies)%20Guidelines%202017.pdf Vide IRDA/F&A/ GDL / PEF / 263 / 12/ 2017 dated December 05, 2017.

[12] Includes an Alternative Investment Fund registered with SEBI under the SEBI (Alternative Investment Fund) Regulation 2012 and/or a Fund specifically formed for investment in one or more entities by one or more persons.

[13] Also applicable when PE Fund invests through SPVs in Insurance Company in the capacity of Indian Investor.

[14] Not applicable to shareholders of SPV holding less than 10 per cent capital of SPV.

[15] As per the Indian Insurance Company (Foreign Investment) Rules, the sum total of direct and indirect foreign investment by Foreign Investors in such company, calculated in accordance with IRDAI (Registration of Companies) regulations 200 read with the Consolidated FDI policy of Government of India.

[16] https://economictimes.indiatimes.com/industry/banking/finance/insure/govt-considering-100-per-cent-fdi-in-insurance-intermediaries/articleshow/64099380.cms.

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