PE Investment in Insurance Companies: Relaxation or Restriction?
The Insurance Regulatory and Development Authority of India (“IRDAI”) has recently notified the IRDAI (Investment by Private Equity Funds in Indian Insurance Companies) Guidelines, 2017 (“PE Guidelines”) on December 5, 2017, which regulates investments by private equity funds into insurance companies.
Prior to the PE Guidelines, there were no regulations specifically catering to private equity investors, and they were considered at par with any other investor for the purpose of investment.
In 2015, the IRDAI notified the IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations, 2015 (“2015 Regulations”), which restricted the quantum of investment by ‘Indian investors’ to 10% individually, and to 25% cumulatively. The individual or overall ceiling did not apply to the promoters or foreign investors.
Private equity investors historically have invested in insurance companies in their capacity as investors, taking minority positions, which would be within 10% (in case of domestic investors, in line with the 2015 Regulations). However, in the recent past, the appetite for private equity funds to take over controlling stake in insurance companies has been on the rise, and this prompted the IRDAI to notify the PE Guidelines and regulate any such investment by private equity funds.
Changes and analysis
1. Applicability – ‘PE Funds’: The PE Guidelines are applicable for investment by ‘Private Equity Funds’ into insurance companies. ‘Private Equity Funds’ (“PE Funds”) is defined in an inclusive manner and includes an alternative investment fund formed under the SEBI (Alternative Investment Fund) Regulations, 2012,. The investment by PE Funds may be structured either as an investor (if the investment is 10% or lower), or as a promoter (if the investment is in excess of 10%).
The PE Guidelines are an extension of the 2015 Regulations, permitting PE Funds to acquire stake of more than 10% if they agree to become a ‘promoter’ of the insurance company. Prior to the enactment of the PE Guidelines, while there were restrictions on domestic private equity funds to acquire not more than 10% individually and 25% in the aggregate in an Indian insurance company, there were no restrictions on foreign private equity funds.
It appears that it is IRDAI’s intention for these requirements to be met by all kinds of PE Funds, both resident and non-resident. The implications of this is significant since the same results in a restriction on foreign funds, which were not hitherto under any such restrictions.
2. Applicability – ‘Unlisted Indian insurance company’: The PE Guidelines are applicable to all Indian insurance companies which are unlisted.
While PE Guidelines are applicable to unlisted Indian insurance companies, it is silent on their applicability post listing of insurance companies. Most of the insurance companies where PE Funds would acquire substantial stake would be unlisted companies, which may be listed over the course of the next few years.
As noted below, the PE Guidelines provide for certain conditions on investment, including lock-in of the shareholding of the PE Funds in insurance companies. If the applicability of the PE Guidelines, and consequently, the lock-in continue to apply post listing, it may result in an anomaly, where there are lock-in restrictions under the IRDAI regulations, as well as under the SEBI regulations.1
The only logical interpretation of the PE Guidelines to ensure a harmonious construction would be to exempt Indian insurance companies that are going for listing from the applicability of the PE Guidelines.
3. PE Fund as an “investor”: The PE Guidelines permit PE Funds to invest into insurance companies as ‘investors’, subject to compliance with the following conditions:
With respect to the carve out provided, the language of the clause seems to suggest that if the current promoter shareholding is more than 50%, such shareholding of the promoter shall be the minimum prescribed shareholding for the promoter / promoter group. However, it is to be seen whether the promoter shareholding is looked at post investment by the PE Fund or prior to such investment.
For example, if the promoter / promoter group owns 52% prior to the PE Funds’ investment, and the PE Funds invests 9% shareholding, pursuant to which the promoter’s shareholding falls below 50%, the prescribed minimum limit for the promoter/ promoter group should be the post issuance shareholding of the promoter. However, the language of the PE Guidelines does not clarify this. It is most likely that the IRDAI shall provide the promoter/ promoter group’s minimum shareholding when the insurance company approaches the IRDAI for approval for the PE Fund’s investment.2
4. PE Fund as a “promoter”: The PE Guidelines permit PE Funds to invest into insurance companies as ‘promoter’, subject to compliance with the following conditions:
Considering that a ‘promoter’ under IRDAI regulations and the PE Guidelines is required to undertake a number of obligations, such as participating in all future fund raises, confirming to IRDAI that the insurance company is ‘resident owned and controlled’, the PE Funds may be vary of becoming ‘promoters’.
While the PE Guidelines seek to regulate investments by financial pooling vehicles into Indian insurance companies, the implications are substantial. The PE Guidelines, on a technical reading, appear to relax the conditions prescribed in the 2015 Circular. However, how the IRDAI finally interprets its applicability and conditions may result in it being a further restriction, rather than a relaxation.
– Abhinav Harlalka, Simone Reis & Nishchal Joshipura
You can direct your queries or comments to the authors
1 SEBI requires promoter securities of a company going for an initial public offering to be locked in for a period of 3 years (up to 20%) and 1 year (for the balance shareholding of the promoter above 20%).
2 Under the Insurance Act, 1938, any change in the shareholding of an insurance company which results in 1% of the share capital of the insurance company to change requires the prior approval of the IRDAI.