Introduction:
Insurance Regulatory Development Authority (“IRDA”, “Authority”) was formed under the Insurance Regulatory and Development Authority Act, 1999 (“IRDA Act, 1999”) as a statutory body that has the “duty to regulate, promote and ensure orderly growth of the insurance business and re-insurance business.”[i]
Private Equity funds primarily invest or acquire a stake in those companies that are not listed on the stock exchange. A Private Equity fund has been defined under the Securities Exchange Board of India (Alternative Investment Fund) Regulations, 2012 (“SEBI[AIF] Regulations, 2012”) as “an Alternative Investment Fund which invests primarily in equity or equity-linked instruments or partnership interests of investee companies according to the stated objective of the fund.”[ii]
Initial Attempt:
IRDA had notified the IRDA (Investment by Private Equity Funds in Indian Insurance Companies) Guidelines, 2017 (“2017 PE Guidelines”) on December 05, 2017. Private Equity Funds (“PE Funds”) were previously allowed to invest in Insurance Companies provided they satisfied certain stipulations, and they had the option of investing via Special Purpose Vehicle(s) (“SPVs”), wherein they would be classified as a ‘promoter’ but only for one specific class of insurer.[iii] Prior to the 2017 PE Guidelines, IRDA had received numerous proposals from Alternative Investment Funds/ Venture Capital Funds seeking to promote an insurance company as a promoter. In light of the above situation, to better regulate the investment of PE Funds in Insurance Companies, the Authority issued the 2017 PE Guidelines, which applied to unlisted Indian Insurance Companies and PE Funds that invest in such companies.
PE Funds were regulated under the ambit of the above-mentioned guidelines, IRDA (Listed Indian Insurance Companies) Guidelines, 2016 & IRDA (Transfer of Equity Shares of Insurer) Regulations, 2015. These guidelines codified the practices of PE Funds and restricted investment of PE Funds in Indian Insurance Companies.The guidelines have made the insurance sector attractive for PE Fund investment which otherwise was seen as a foreign and uncontrolled space for investors seeking to be an integral part of the insurance industry.
Subsequent Attempt:
Further, to promote growth and ease of business by simplifying the registration process in the insurance sector, the Authority, on December 05, 2022, introduced the IRDA (Registration of Indian Insurance Companies), Regulations, 2022 (“2022 Regulations”). The definition of PE Fund was expanded to include:“(i) an Alternative Investment Fund or its manager registered with SEBI (Alternative Investment Fund) Regulations, 2012; and/or (ii) a Fund or its manager registered for the purpose of investment, with International Financial Services Centres Authority; and/or (iii) Funds specifically formed for investment which are registered or their manager is registered with any financial sector regulator in any FATF compliant jurisdiction…..”[iv] ‘Promoter’ under the 2022 Regulations includes an ‘Indian Investor’ and the scope of investment by a ‘Foreign Investor’ was expanded as they could now be actively classified as ‘promoters’ of Indian insurance companies. Under the 2017 PE Guidelines, private equities could invest, but their investment was restricted as they were necessitated to create an Indian SPV to acquire a stake in insurance companies. However, with the notification of the 2022 Regulations, the requirement to create an SPV to invest is no longer mandatory.
Comparison of key areas:
Below is a table that points out differences between the 2017 PE Guidelines and the 2022 Regulations.
| Particulars | 2022 Regulations | 2017 PE Guidelines |
| Capacity as an investor/ promoter | Before the 2022 Regulations, the investment of PE Funds in the insurance companies as a promoter was restricted and regulated via SPV. However, with the introduction of the above regulations, PE Funds now have the option of investing directly as a promoter.[v] | The 2017 PE Guidelines codified the investments by private equities and allowed PE Funds to be a promoter, subject to certain restrictions.[vi] |
| Special Purpose Vehicle | Creation of an SPV is not a mandatory condition to invest in an insurance company as they can invest as an investor or promoter without the creation of an SPV as previously laid down in the 2017 PE Guidelines. | Creation of SPV is mandatory for a PE Fund seeking to invest as a promoter in an insurance company in addition to a plethora of conditions laid down in the guidelines. |
| Minimum shareholding of ‘all’ the Promoters | Minimum shareholding of 50%, however, they can dilute their stake below 50% but not less than 26% provided i) shares of the insurer are listed, and ii) the insurer’s solvency ratio 5 years preceding dilution of stake is above the control level.[vii] | PE Funds did not have the option of diluting their stake as a Minimum shareholding of 50% was to be maintained at all times.[viii] |
| Maximum investment as an ‘investor’ | 2022 Regulations allow a ‘single investor’ to hold not more than 25% of the paid-up equity share capital of the insurance company and the collective investment by all the investors should not exceed 50% of the paid-up equity share capital of the insurance company (however if it is a listed company, the limit for collective investment does not apply).[ix] | The PE Fund could not hold more than 10% of the paid-up equity capital of the insurance company.[x] |
| Lock-In | Various lock-in periods are applicable for investors who invest in various capacities of a ‘promoter’ or ‘investor’, for instance, when investing as a promoter or investor within 5 years after the grant of certificate of registration and there is a change in the shareholding pattern due to such investment, the equity shares would be locked in for 5 years from the date of investment or 8 years from the grant of certificate of registration, whichever is earlier.[xi] | Investment through an SPV would be subject to a lock-in of five years and would apply to all its shareholders. However, if the shareholders of the SPV hold less than 10% of the share capital of the SPV, lock-in restrictions would not be applicable to those specific shareholder(s). |
Conclusion:
Many players in the private equity space consider the introduction of the 2022 Regulation as a flexible approach by the Authority to promote the growth of the insurance sector. These Regulations are seen as path-breaking because they make the sector attractive for investment, improve the process for insurance companies to access capital, and reduced the interference of the regulatory body when raising funds.
IRDA has also laid down ‘fit & proper’ guidelines to be followed for investors seeking to engage with insurance companies, thus ensuring that the players in the insurance sector have the capability to cater to the demands of the insurers. While making the entry for PE Funds in insurance companies a walk-in, it has also made the exit route smoother for such funds.
This move by IRDA is seen as a nudge toward unlisted insurance companies to seek finance from PE/ Venture Capital funds to enable such unlisted companies to raise capital and list at large levels. However, to ensure the playing field remains even and secure for participants in the market, monitoring, and supervision by the Authority is a must by, including but not limited to, receiving feedback from persons involved in the sector and plugging loopholes in the regulations, and redressing grievances of the participants seeking a remedy from the Authority
Author: Shubham Tibrewala, Associate
Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at info@samistilegal.in
[i] Section 14, IRDA Act, 1999.
[ii] Section 2(r), SEBI(AIF) Regulations, 2012.
[iii] Part B, Paragraph 5, IRDA (Investment by Private Equity Funds in Indian Insurance Companies) Guidelines, 2017.
[iv] Regulation 2(l), IRDA (Registration of Indian Insurance Companies) Regulations, 2022.
[v] Regulation 6(9), IRDA (Registration of Indian Insurance Companies) Regulations, 2022.
[vi] Part B, Paragraph 5(i), IRDA (Investment by Private Equity Funds in Indian Insurance Companies) Guidelines, 2017.
[vii] Regulation 6(6), IRDA (Registration of Indian Insurance Companies) Regulations, 2022.
[viii] Part B, Paragraph 3(iv), IRDA (Investment by Private Equity Funds in Indian Insurance Companies) Guidelines, 2017.
[ix] Regulation 6(7), IRDA (Registration of Indian Insurance Companies) Regulations, 2022.
[x] Part B, Paragraph 3(ii), IRDA (Investment by Private Equity Funds in Indian Insurance Companies) Guidelines, 2017.
[xi] Regulation 6(1), IRDA (Registration of Indian Insurance Companies) Regulations, 2022.
