Winds of change in insurance boardrooms

There are stirrings in the insurance sector - foreign joint venture firms are raising their stake to 49 per cent while their Indian partners retain management control. Experts discuss how the control

Board composition may not undergo much change: Shailaja Lall

The Union government's Insurance Laws (Amendment) Bill, 2015, passed by both Houses of Parliament earlier this month, has the condition that management and control of insurance companies should be with the Indian partners.

The term "control" here has the same meaning as in foreign direct investment (FDI) - the power or right to appoint most of the directors, or control management and policy decisions. This power is provided by virtue of their shareholding, management rights, shareholders' agreements or voting agreements.

The insurance sector is eagerly awaiting the interpretation of the Act by the Insurance Regulatory and Development Authority of India (Irdai). Some of the emerging views are:

• Even if the foreign promoter increases its shareholding from 26 per cent to 49 per cent, the board composition may not undergo much change.
• Key management positions such as managing director, chief executive officer, chief finance officer, and actuary have to be held by Indians.
• Clarity is also required as to whether or not Indians should have the majority strength on the board, as required in the telecom sector.

If existing foreign partners with 26 per cent shares are already permitted to exercise veto rights and nomination rights of key employees, it is expected that they - now allowed to increase their stake to 49 per cent - can continue exercising these rights. They are for "minority protection" rather than "control".

Until Irdai's clarifications are out, it is premature to start amending existing joint venture/shareholder agreements, with respect to day-to-day management and operations.

Shailaja Lall
Partner, Amarchand & Mangaldas & Suresh A Shroff & Co

Management control need not be through veto rights: Abizer Diwanji

The issue of Indian-owned and controlled entities has been discussed often. The Department of Industrial Policy and Promotion, the Companies Act, 2013, as well as the regulators have had views on its definitions, revised with time.

Until recently, control was defined as either having a majority of directors or having more than 50 per cent of the shareholding. Both were measurable, and hence had less ambiguity. With the advent of press note 4 and more recently, the Act, the definition also includes management rights, veto rights, etc. This seems to increase the level of ambiguity on its interpretation.

However, the industry should be able to interpret the rules and whether the management rights are either protective or substantive.

The Companies Act, 2013, mainly defines control from the point of view of governance and accounting. Accounting requires consolidation, which would present results of companies, controlled by a management and would define its span of actual control. Board decisions are influenced by the presence of independent directors who bring in the requisite governance standards.

The Foreign Investment Promotion Board (FIPB) mainly monitors sectorial caps and its definition of control came in on the basis that foreign holders who own and control multiple entities with the intent of violating these caps do not do so.

Hence, to take a view that management control is obtained through veto rights is not necessarily looking at the issue in its right spirit. That, I presume, is the reason shareholder agreements have been accepted especially in the insurance sector in the past where the sectoral caps according to FIPB have been met. Shareholder agreements just define shareholder rights to protect respective investments.

Abizer Diwanji
Partner & National Leader - Financial Services, EY

Views are of the authors