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IRDA Guidelines on Indian owned and controlled insurance companies

Finsec Law Advisors

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The Insurance Regulatory and Development Authority (the insurance regulator) has recently issued guidelines under the Insurance Act, 1938 which defines ‘Indian insurance company’, among other things, to mean “an insurer in which the aggregate holdings of equity shares by foreign investors, including portfolio investors, do not exceed forty-nine per cent of the paid up equity capital of such Indian insurance company, which is Indian owned and controlled, in such manner as may be prescribed.”

Through these guidelines, IRDA attempts to clarify the meaning of ‘Indian owned and controlled’. The definition of ‘control’ has been borrowed verbatim from the SEBI Takeover Regulations. Over and above the stipulation that Indian insurance companies need to be Indian owned and controlled, insurance companies are also required to ensure that (a) a majority of directors (excluding independent directors) are appointed by the Indian promoter; (b) appointment of key managerial personnel including the CEO/MD/principal officer has to be done through the board or the Indian promoter. Other KMPs may be appointed by the foreign investor provided the appointment is approved by the board; (c) control over significant policies of the company should be exercised by the board provided its constitution is compliant with (a) above; and (d) where the chairman of the board has a casting vote, such chairman shall be nominated by the Indian promoter. The guidelines also specify that in order for a valid quorum at a board meeting presence of majority of Indian directors is necessary, irrespective of whether foreign investor’s nominee is present or not. Insurance Companies have been given a period of 3 months to comply with the guidelines and have also been asked to provide an undertaking from the CEO/Compliance Officer certifying that the company has complied with these guidelines. These guidelines have also been made applicable to insurance intermediaries.

These are far reaching changes in the insurance industry and many insurers and intermediaries will now have to amend their JV/shareholder agreements in order to comply with these guidelines. The guidelines seem excessive in so far as they insist on micro-managing the composition of company boards. Had the guidelines merely prescribed that insurers/intermediaries be Indian owned and controlled (both of which are well defined concepts under Indian laws) that would have achieved the desired effect without increasing compliance costs for these companies.