Promoters may change structure for insurance subsidiaries

Indian promoters of insurance companies and brokers may have to have separate structures for these subsidiaries in order for them to remain under 'Indian management and control'.

While Insurance Regulatory and Development Authority of India (IRDAI) is yet to offer clarifications on whether an Indian entity (and promoter) has to immediately reduce foreign holding (including foreign institutional investors and foreign portolio investors) or if Foreign Investment Promotion Board (FIPB) will take a call on this, sources said that those that are not able to reduce their holdings may bring about separate structures for insurance, putting under a different company structure. 

According to these rules, foreign equity investment cap of 49% is applicable to all Indian insurance companies and they cannot allow the aggregate holdings by way of total foreign investment in their equity shares by Foreign Investors, including portfolio investors, to exceed 49% of their paid-up equity capital.

They also have to ensure that ownership and control shall remain at all times in the hands of resident Indian entities as referred to in these rules.



IIFL Holdings recently received the approval of the insurance regulator for the transfer of 75% shareholding in India Infoline Insurance Brokers to Orpheus Trading. This is a company owned by promoters of IlFL Holdings, who are Indian residents, at fair value as certified by Independent Chartered Accountant.

Last week, the company had said that the proposed transfer of share-holdings in the insurance broking subsidiary of the company was to comply with the recent Insurance Laws (Amendment) Act, 2015, Indian Insurance Companies (Foreign Investment) Rules, 2015. Pursuant to this transfer, the insurance broking company has ceased to be a subsidiary of the company. 

"We do not know if IRDAI will offer clarity or will individual cases be referred to FIPB. However, if there is a short frame of time given to reduce FII stake, companies may have to either have a separate holding entity promoted by the same founders of the group or get in more partners," said the chief executive of a large life insurer.

As per FIPB rules, Foreign Direct Investment (FDI) proposals up to 26% of the total paid-up equity of the Indian Insurance Company will be allowed on the automatic route, and FDI proposals which take the total Foreign Investment above 26% and up to the cap of 49% shall require FIPB approval. 

Several proposals for increase in FII holdings are pending with FIPB on one hand which has also impacted approvals for their insurance ventures. The chief financial officer of a bank-promoted insurer explained that till now there has not been any communication from IRDAI to reduce holdings.

"However, if FII Holdings would mean foreign promoted, half of the insurers would actually have much more foreign investments. But, this does not mean foreign investors have a say in board decisions or appointments," he said. 

Though the Insurance Act was passed few months ago, neither FIPB nor IRDAI has clarified what 'Indian management and control' would mean. Insurers said that the regulator is waiting for detailed norms from FIPB and department of financial services and hence has not yet brought out regulations on this. 

Companies including Edelweiss Tokio Life, Bharti AXA had filed applications with the Foreign Investment Promotion Board (FIPB) for increasing stake of its JV partners from 26% to 49% in the company. Bharti AXA has already got a nod for AXA to raise its stake to 49% and was the first insurer to increase its stake.



However, several others are waiting for IRDAI to give its definition of what these norms would mean. Almost all life and general insurers have stated an intent from foreign partner to raise stake in the JV, but are in a wait-and-watch mode. 

According to foreign direct investment norms in India, ‘control’ includes the right to appoint most of the directors or control the management or policy decisions, by virtue of shareholding, management rights, shareholder agreements or voting agreements.

Sources said it was likely voting rights wouldn’t be restricted to 49%. They added most of the board members would be appointed by the Indian promoter. However, legal opinion is being sought on whether only India-born individuals would be appointed chief executives and managing directors.