The control and acquisition of entities in India by foreign investors and private equity (PE) funds is regulated by:
- the foreign investment norms specified by the Reserve Bank of India;
- the norms specified by the Securities Exchange Board of India (where the entity is a listed entity); and
- any other laws or regulations governing the business of the target entity.
Entities engaged in insurance business must follow additional norms regarding foreign investment as specified by the Insurance Regulatory and Development Authority of India (IRDAI). This article answers commonly asked questions in relation to foreign investment in insurers in light of the extant insurance statutory and regulatory framework.
What are the limits of foreign direct investment with respect to Indian insurers?
Pursuant to the Insurance Act 1938 (as amended), foreign investment in Indian insurers is permitted up to 49% of the paid-up equity capital of such insurer. Indian insurers must be 'Indian owned and controlled' at all times. On 19 October 2015 the IRDAI published a circular which sets out the norms in this regard. The key considerations to ensure that insurers are Indian owned and controlled are the following:
- The insurer must be under Indian control. The term 'control' has been defined under the Insurance Act to include the right to appoint a majority of the directors or control management or policy decisions, including by virtue of shareholding or management rights or shareholders' or voting agreements.
- The majority of the board of directors – excluding independent directors – must be nominated by the Indian promoters and investors.
- Key management personnel – including the CEO and the principal officer – must be appointed by the board of directors or by the Indian promoters and investors.
- Foreign investors may nominate a key management person (excluding the CEO), but the board of directors must approve the nominee.
- If the chair of the board of directors has a casting vote, they must be nominated by the Indian promoters and investors.
- A valid quorum for a board meeting will be constituted with the presence of a majority of the Indian directors.
Press reports indicate that the government is considering increasing the foreign direct investment limit in insurers from 49% to 74%. If the foreign direct investment limit is increased, the IRDAI will likely revisit certain pre-existing norms (eg, norms on Indian ownership and control norms as applicable to insurers) and foreign investors will need to watch out for these amendments and clarifications to better understand the way in which business will need to be undertaken.
What should parties consider at the time of entry into the Indian insurance sector?
Pursuant to Section 6A of the Insurance Act read with the IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations 2015, the IRDAI's prior approval must be obtained in the event of a change in shareholding of an insurer or reinsurer where, after the transfer, the total shareholding of the transferee will likely exceed 5% of the company's total paid-up capital. In addition, the IRDAI's prior approval must be obtained if the nominal value of the shares intended to be transferred by any individual, firm, group, constituents of a group or body corporate under the same management, jointly or severally, exceeds 1% of the insurer's or reinsurer's total paid-up capital.
There are no specific provisions dealing with background investigations of officers and directors of acquirers. However, while obtaining the IRDAI's approval, information may need to be submitted regarding whether the transferee's directors have ever been refused a licence or authorisation in the past to carry out regulated financial business or whether any company, firm or organisation with which such directors have been associated as directors, officers or managers has been investigated by a regulatory or professional body.
The IRDAI (Registration of Indian Insurance Companies) Regulations 2000 also provide a reporting requirement, whereby every insurer must provide a statement indicating any shareholding changes exceeding 1% of the promoter's paid-up capital within 45 days of the end of every quarter. However, any change in excess of 5% of promoters' paid-up capital must be reported to the IRDAI immediately.
Can PE and alternate investment funds invest in Indian insurance business?
Prior to 2017, investment by PE funds in Indian insurers was not specifically regulated. However, as PE funds started to invest in Indian insurers and the promoters thereof, it became necessary to regulate such investments, bearing in mind the nature of investments that may be made by PE funds. On 5 December 2017 the IRDAI issued the IRDAI (Investment by Private Equity Funds in Indian Insurance Companies) Guidelines 2017 to regulate PE investment in insurers.
The guidelines allow for PE funds to invest either directly in Indian insurers in the capacity of an investor or to invest through a special purpose vehicle (SPV) in the capacity of a promoter in the insurer. Therefore, a PE fund can invest in Indian insurers either as a promoter, where its investment exceeds 10% of the insurer's equity capital (through an SPV) or as an investor where its investment is less than or equal to 10%.
Where a PE fund invests directly in an insurer, the fund cannot hold more than 10% of the insurer's paid-up equity share capital. Further, in such a scenario, all Indian investors, including PE funds, cannot jointly hold more than 25% of the insurer's paid-up equity share capital.
What exit strategies can foreign investors use to exit from insurers?
Where a foreign entity is identified as a promoter of the insurer, the entity will be bound by the lock-in period as specified under the applicable norms or other conditions in relation to exit as imposed by the IRDAI at the time of investment.
The exit strategy most commonly adopted by foreign investors to exit from Indian insurers is private sale. There are limited legal restrictions prescribed under the regulatory framework in relation to the person to whom such private sale of shares may be done and the primary restrictions emanate from contractual obligations. Transfer restrictions under shareholders' agreements and constitutive documents include:
- rights of first refusal;
- rights of first offer;
- co-sale rights; and
- put and call options.
Shareholders' agreements executed between the company, the promoters and investors often also include an obligation on the company and its promoters to provide investors with an exit through an initial public offering (IPO) within a defined timeline. However, these obligations are not entirely binding on the company, as IPOs are largely market driven. With the notification of the guidelines, divestment to PE funds has become another option that investors are considering for exiting insurers.
What exit strategies can PE funds use to exit from insurers?
Where a PE fund invests in an insurer through an SPV in the capacity of a promoter, it cannot leave at will. The guidelines stipulate a five-year lock-in period for an SPV which invests in an insurer and the investors of the SPV (which hold more than 10%) of the SPV's capital. PE investors in India prefer to exit either through private sales or IPOs. IPOs continue to be the exit route of choice for most PE investors, given larger access to capital and the free transferability of shares.
