India: IRDAI: Walking The Talk?

Last Updated: 7 January 2016
Article by Rishabh Sharma, Abhinav Harlalka and Simone Reis
  • IRDAI provides clarity on the 'Indian ownership and control' test required to be met by all Indian insurance companies and insurance intermediaries.
  • Defines 'Control' to mean the right to appoint a majority of the directors or control the management or policy decisions.
  • Provides a compliance window till February13, 2016 to comply with the guidelines which may be extended for another period of 3 months upon request being made to the IRDAI.
  • IRDAI allows Indian insurance companies to issue preference shares and debentures, subject to prior approval from the IRDAI and certain restrictions on the terms of such instruments.

In a move to liberalize the insurance sector, the Insurance Laws (Amendment) Act, 2015 ("2015 Act") was notified in March, 2015. The 2015 Act, amongst other things, increased the foreign investment limit in Indian insurance companies and allowed Indian insurance companies to issue 'other forms of capital' as may be prescribed by the Insurance Regulatory and Development Authority of India ("IRDAI").1 In exercise of the powers provided to IRDAI by virtue of the 2015 Act, IRDAI has now clarified 'Indian ownership and control' and has also permitted fund raising avenues, in addition to equity shares, for insurance companies in India.


The 2015 Act, while increasing the foreign investment limit in insurance companies provided that the insurance company would, at all times, necessarily be required to be owned and controlled by Indian residents.2 The IRDAI, by a notification dated October 19, 2015 ("Guidelines") has issued guidelines clarifying the aspects of Indian residents maintaining 'ownership' and 'control' for insurance companies. By a circular dated November 20, 2015, the principles mentioned in the Guidelines have now been extended to all insurance intermediaries as well.

Insurance companies were hitherto prohibited from issuing any form of capital, other than equity shares. The 2015 Act has now amended Section 6A of the Insurance Act to allow insurance companies to issue 'other form of capital', as may be prescribed by IRDAI. Pursuant to such change, the IRDAI has now permitted other forms of capital to be issued by insurance companies by way of the IRDAI (Other Forms of Capital) Regulations 2015 notified on November 13, 2015 (the "Regulations"). The Regulations lay down the framework for the instruments eligible as 'other forms of capital' and the conditions for such issuance.


In the Guidelines, while acknowledging that 'control' may be exercised by virtue of (i) shareholding; (ii) management rights; (iii) shareholders' agreement; (iv) voting agreements; or (v) any other means as per applicable laws, the IRDAI has sought to provide some clarity on its interpretation of 'control'.

  • Applicability: The Guidelines have clarified that the Indian owned and controlled test would be required to be met by all insurance companies, whether seeking to increase their foreign investment or not. The Guidelines are also applicable to all 'insurance intermediaries' as defined in the Insurance Regulatory and Development Authority of India Act, 1999, such as brokers, third party administrators, surveyors and loss assessors.
  • Board and key management personnel:

    • Composition of the board: The Guidelines clarify that the majority of the directors, excluding the independent directors should be nominated by Indian promoters/ Indian investors. The chairman of the board can have a casting vote, provided such chairman is appointed by the Indian promoter/ Indian investor. Accordingly, it seems that the foreign investor may also be entitled to appoint the chairman of the board, provided such chairman does not have a casting vote.
    • Key management personnel: The key management personnel, including the chief executive officer, the managing director, the principal officer, etc. shall generally be appointed through the board of directors or by the Indian promoter/ Indian investor. However, the key management persons may also be nominated by the foreign investor provided the board of directors approves such nomination in accordance with the conditions mentioned above.
    • Quorum: The Guidelines clarify that the quorum for meetings shall be constituted by a majority of Indian directors, provided however, that a foreign investor's right to have its nominee director present for constituting a valid quorum shall not be considered 'control'.
    • Significant policies: The Guidelines clarify that the board of the insurance company shall control all 'significant policies' of the insurance company. While the intent seems to be to ensure that the foreign investors do not control such policies, the Guidelines fall short of explaining what 'significant policies' are.
    • Lack of clarity on negative control: Most foreign investors in existing insurance companies had extensive rights, including veto rights, since there was no requirement of control of an insurance company to be with Indian residents. The Guidelines are silent on the ability of the foreign investor to have veto or affirmative voting rights. It is to be seen if IRDAI considers any veto right to tantamount to control. Considering that the foreign investor is entitled to have a nominee present for the purposes of formation of a quorum (for minority protection purposes), it may be assumed that veto rights which are merely minority protection would be permissible.
  • Compliance mechanism and the timelines: Under the Guidelines, every Indian insurance company needs to file an undertaking signed by its chief executive officer and the compliance officer confirming that the company is 'Indian owned and controlled'. Along with such undertaking, the insurance company also needs to file a resolution of the board of directors confirming that the company is 'Indian owned and controlled'. All insurance companies existing at the time of the issuance of the Guidelines need to comply with the Guidelines within 3 months from the date of the issuance of the Guidelines, which may be extended for another period of 3 months, on an application by such insurance company to the IRDAI. Insurance companies coming into existence post the notification of the Guidelines would need to comply with the Guidelines prior to the grant of registration of certificate.


While the Guidelines have provided clarity on what would be objectively prohibited to ensure that the control resides with Indian residents, most of the rights which a foreign investor may exercise have been left subjective, which has resulted in lack of certainty. This assumes further significance for existing joint ventures, which have to amend their existing agreements to ensure that the principles under the Guidelines with respect to Indian ownership and control are adhered to.

'Other forms of capital'

Insurance companies were hitherto permitted to issue only one class of equity shares. The Regulations now permits insurance companies to issue 'preference shares' and 'debentures' as defined under the Companies Act 2013 ("CA 2013"), subject to prior approval from the IRDAI. Accordingly, insurance companies can now issue preference shares and/ or debentures, provided they fulfil the conditions discussed below.

  • Terms: The preference shares or debentures to be issued by the insurance company must necessarily meet, among others, the following conditions:

    • It must be unsecured and should not be covered by any guarantee of the insurer or any other arrangement that enhances the seniority of the instrument holder above that of the claims of the insurer's policyholders or creditors;
    • It must have a maturity or redemption period of not less than 10 (ten) years (reduced to 7 (seven) years in the case of health insurance companies);
    • The floating rate of interest (if applicable) for a debenture shall be with reference to a market determined rupee interest benchmark rate;
    • Rate of interest or dividend payable on such instruments shall, at all times, be subject to compliance with the solvency margin as prescribed by the IRDAI;
    • the dividend or interest payable on such instruments shall not be cumulative. Consequently, unpaid dividend or interest in a given year cannot be paid in the subsequent years;
    • If such instruments are being issued to foreign investors, the provisions of Foreign Exchange Management Act, 1999 ("FEMA") and the terms and conditions, if any, stipulated by Securities Exchange Board of India / other regulatory authorities in relation to issue of such instruments, are to be complied with. This would necessarily imply that if the preference shares and/ or debentures are being issued to non-residents, the instruments would need to be compulsorily convertible into equity shares.
  • Limits: The Regulations provides that the total quantum of the instruments issued under the Regulations (i.e. the debentures and preference shares) shall not, at any time, exceed (i) 25% of the equity share capital and securities premium of the insurer; and (ii) 50% of the net worth of the company. It would be interesting to note how this would be dealt with by IRDAI. In case the net worth of the insurance company falls below 50%, the insurance company would be compelled to increase its equity share capital, which could be a challenge at such time.
  • Prior approval of IRDAI for issuance: A company proposing to issue instruments under the Regulations shall have to make an application for obtaining the prior approval of IRDAI for issuance of the instruments. The application for approval shall include the prescribed details, including projected business plan, terms of the instruments to be issued, rational for issuance of such instruments over equity shares.

    While most of the disclosures seem to be standard, it is to be seen how IRDAI deals with the rationale for the issuance of 'other capital' as against issuance of equity shares. Preference shares, especially convertible preference shares, are generally issued to provide anti-dilution protection to investors whilst debentures, whilst they are principal protected instruments, are also issued for tax optimization. It is unclear to what extent the IRDA will seek to inquire into the rationale of why these instruments are being issued.
  • Call option/ put option: While the instruments cannot be issued with a 'put option', it is unclear as to whether the restriction on issuing these instruments with a put option is vis-à-vis the issuing company, and whether a put option against the promoters of the issuing company would be permitted. However, instruments with call options are permitted vis-à-vis, provided that the call option can be exercised only (i) post 5 (five) years of its issuance, and (ii) the prior approval of the IRDAI has been obtained for such exercise. The Regulations also provide the IRDAI with the authority to allow a company proposing to exercise call option to replace the called instrument with an equal or better quality instrument.
  • Transfer of shares: While the Regulations do not prohibit transfer of the instruments issued under the Regulations, Section 6A of the Insurance Act, 1938 requires the approval of the IRDAI for any transfer of shares if the transferee holds 5% or more shares of the insurance company. Since preference shares forms part of the share capital of a company, approval of the IRDAI should be required in case of a transfer of preference shares issued under the Regulations. However, debentures issued under the Regulations do not squarely fall under the same restriction.
  • Conversion: While the Regulations are silent as to whether the convertible instruments issued under the Regulations can be converted into equity shares, it seems to suggest that the same may be permitted after the expiry of the minimum maturity period prescribed under the Regulations. It is also to be seen as to whether an approval from the IRDAI would be required for conversion of such convertible instruments, if such conversion attracts Section 6A of the Insurance Act, 1938.
  • Available solvency margin: The total quantum of the instruments issued under the Regulations will be eligible to be included as part of the capital for the purposes of calculation of 'available solvency margin'3 for the first year from the date of issuance of these instruments. However, there will be a progressive hair-cut in the proportion in which the instruments are to be included for the purposes of calculation of the 'available solvency margins' for the final five years prior to maturity of such instruments.

This will be a huge reprieve for insurance companies as they will have more flexibility in terms of permitted capital raising avenues to comply with the solvency margin prescribed by the IRDAI. While the Regulations are a step in the right direction, it creates a number of ambiguities, which require clarification. Further, investments into Non-Convertible Debentures ("NCDs") issued by Indian companies have become an attractive proposition for foreign portfolio investors due to the non-applicability of pricing restrictions and tax optimization purposes. NCDs allow foreign investors with a lot of flexibility in terms of interest rates and the redemption premium on the NCDs can also be structured to provide market linked returns obtained through exposures on exchange traded derivatives, in addition to the returns assured on the coupon on the NCD. However, the excessive restrictions placed on the issuance of instruments under the Regulations, including NCDs will be a kill joy as it takes away the flexibility from the foreign investors to structure their investments and returns. Therefore, in order for these instruments to be a success, the instruments may need to be more commercially viable, so as to attract the investors.


1. For a detailed analysis on changes in the foreign investment introduced by the 2015 Act, please refer to our earlier hotline here

2. Control is defined under Section 2 (7A) of the Insurance Act to include 'the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements'.

3. Clause 1(a) of Schedule III-A of the Insurance Regulatory and Development Authority (Assets, Liabilities, and Solvency Margin of Insurers) Regulations, 2000 defines 'Available Solvency Margin' to mean, "the excess of value of assets (furnished in IRDA- Form- AA) over the value of life insurance liabilities (furnished in Form H as specified in Regulation 4 of Insurance Regulatory and Development Authority (Actuarial Report and Abstract) Regulations, 2000) and other liabilities of policyholders' fund and shareholders' funds".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Shardul Amarchand Mangaldas & Co
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Shardul Amarchand Mangaldas & Co
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions