Irda to examine NOFHc structure for insurance companies

Insurance Regulatory and Development Authority (Irda) will examine the issues arising out of a Non-Operating Financial Holding Company (NOFHC), which would be a subsidiary of the promoter company, to hold stake in an insurance company.

As per present rules, a subsidiary company cannot hold stake in an insurance company. As per new bank license guidelines by the Reserve Bank of India (RBI), a company who is a promoter of an insurance firm will have to float an NOFHC for engaging in insurance activities.

This NOFHC will become a subsidiary of the promoter entity.

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

RBI has issued a list of clarifications on questions raised by aspirants of new banking licenses. In these clarifications, RBI has said that the regulated financial services sector entities in which a Promoter Group has ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) will be held under the NOFHC. It added that while this is a preferred structure, these requirements are subject to the regulations of the respective regulators.

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

The applicants had raised queries with respect to whether there would an exception be made for insurance companies or would a specific approval from the Irda be available enabling the NOFHC to qualify as a promoter of an Insurance company.

Insurance companies like Birla Sun Life Insurance, Reliance Life Insurance, Reliance General Insurance, Shriram Life Insurance, Bajaj Allianz General Insurance and Royal Sundaram Allianz Insurance among others have Indian promoters, who have banking aspirations.

In its new bank license guidelines, RBI had said that it could allow corporate groups, non-banking financial companies (NBFCs) and public sector entities to set up a bank only through a wholly-owned NOFHC. The NOFHC, registered as an NBFC, will hold the bank and other financial services entities of the promoter group.

According to the Irda (Registration of Indian Insurance Companies) Regulations, 2000, an Indian promoter can be a company formed under the Companies Act, 1956; not a subsidiary as defined in Section 4 of that Act. This means subsidiaries cannot become promoters of insurance companies.

Hence, post issuance of licenses, when some insurance companies would be promoted by subsidiaries, the insurance regulator would need to make some changes to its regulations to prohibit a violation of rules.