Insurers' non-operating fin arms under spotlight

Rules don't allow subsidiaries to hold stake in insurance firms

The Insurance Regulatory and Development Authority (Irda) will examine how non-operating financial holding companies (NOFHC), which are subsidiaries of a promoter company, can hold stake in insurance firms.

"Our rules do not allow subsidiaries to hold stake in an insurance company. Hence, we will have to examine NOFHCs holding stake in insurance companies. We will look into this matter and decide on the changes that need to be made," said a senior Irda official.

According to the Reserve Bank of India's (RBI) new bank licence guidelines, promoter companies of insurance firms should float NOFHCs to do insurance activities.

While RBI said this is the 'preferred structure', it added this is subject to the regulations of the respective regulator.

"The applicants may approach Irda in this regard. The decision of Irda will prevail," said RBI in response to the questions on whether these NOFHC would be eligible to become insurance company promoters.

The applicants had queried whether an exception would be made for insurance companies or a specific approval from the Irda would be given, to enable NOFHCs to qualify as promoters of insurance firms.

Insurance companies such as Birla Sun Life Insurance, Reliance Life Insurance, Reliance General Insurance, Shriram Life Insurance, Bajaj Allianz General Insurance, and Royal Sundaram Allianz Insurance have Indian promoters with banking aspirations.

According to the Irda (Registration of Indian Insurance Companies) Regulations, 2000, an Indian promoter can be a company formed under the Companies Act, 1956, but not a subsidiary as defined in Section 4 of that Act.

This means, subsidiaries cannot become promoters of insurance companies. Therefore, after issuance of licences, if an insurance company is promoted by its subsidiary, then the insurance regulator will have to make some changes to its regulations to prohibit a violation of rules.
GOOD TIMES

• RBI has said floating non-operating financial holding companies is the 'preferred structure'
• The central bank has said this is subject to the regulations of the respective regulator
• An Indian promoter can be a company formed under the Companies Act
• If an insurance company is promoted by its subsidiary, the insurance regulator will have to make changes to its regulations to prohibit a violation of rules

SWEEPING THE DOUBTS

• Non-operative financial holding company (NOFHC) must be wholly-owned by a single promoter group
• Applicants must approach other financial regulators to bring entities regulated by them under NOFHC
• If any promoter group entity is in existence for less than 10 years, track record for the period of existence will be seen
• NBFC can promote a bank through NOFHC, provided the existing NBFC business is shifted to the bank
• No single entity or group, other than NOFHC, can have over 10 per cent of the voting equity capital of the bank
• Para-banking activities like credit cards can be conducted either through the bank or subsidiary of NOFHC/JV
• Businesses like insurance and asset management can be conducted only outside the bank
• Lending activities must be conducted from inside the bank
• Foreign Indian citizens and person of Indian origin can become bank chairman or chief executive but cannot have stake in NOFHC
• Foreign direct investment in new banks to be capped at 49 per cent for initial five years
• New banks must have at least Rs 500 crore of voting equity capital
• If an NBFC converts into a bank, minimum net worth of Rs 500 crore must be maintained all times
• Both new and existing banks need to have 25 per cent of branches in unbanked rural centres
• RBI may allow new bank to take over and convert existing NBFC branches in Tier-II and VI centres