IRDAI proposes conditions for private equity funds in insurance companies

A private equity fund will be allowed to invest in any insurer in the capacity of “promoter” if it has completed 10 years of operation and the funds raised by the PE fund, including its group entities, is US $ 500 million or more (or its equivalent in rupee, IRDAI said. “The investible funds available with the PE fund should not be less than $ 100 million,” the regulator said in its exposure draft on Registration of Indian Insurance companies (Regulations) 2022.

Investment by PE funds is expected to bring in more foreign investment to the country. In 2020, the government had increased the foreign direct investment limit in insurance firms from 49 per cent to 74 per cent under the automatic route. IRDAI had given in principle approval to PE funds to invest in insurers in 2017. While private investment in insurance is big business in the US and Europe, it’s yet to take off in India. In 2021, private investors announced deals to acquire or reinsure more than $200 billion of liabilities in the US.

IRDAI said the equity contribution of promoters and other investors will have a lock-in period of five years at the time of granting the final approval or even before that. The lock-in for investment after five years but before 10 years will be three years or 12 years from the date of grant of registration, whichever is earlier, and after 10 years, the lock-in will be two years or 11 years from the grant final registration, the regulator said.

According to the IRDAI draft, investment in the capacity of an investor, directly or indirectly, in an Indian insurer should be less than 25 per cent of the paid-up equity capital of the insurer. Investment in the capacity of investors should be restricted to not more than two life, two general, two health and two reinsurers, it said.

The regulator has proposed that the minimum shareholding of promoters should be maintained at above 50 per cent of the paid-up equity capital of the insurer. Promoters may dilute their stake in the insurer below 50 per cent but not below 26 per cent of the paid-up equity capital if the insurer has a track record of solvency ratio above control level during 5 years immediately preceding the dilution of stake by promoter and the shares of the insurer are listed on the stock exchanges.

In an Indian insurer having foreign investment, a majority of its directors, key management persons, and at least one among the chairperson of its board, its managing director and its Chief Executive Officer should be resident Indian citizens, it said.

Further, in an Indian Insurer having foreign investment exceeding 49 per cent, not less than 50 per cent of its directors should be independent directors. If the chairperson of its board is an independent director, at least one-third of its board should comprise independent directors, the regulator said.

Moreover, for a financial year for which dividend is paid on equity shares and for which at any time the solvency margin is less than 1.2 times the control level of solvency, not less than 50 percent of the net profit for the financial year should be retained in general reserve, IRDAI said.

Earlier, in 2016, IRDAI had proposed that the board of directors was required to have a minimum of three “independent directors”. However, this requirement is relaxed to ‘two’ independent directors, for the initial five years from grant of certificate of registration to insurers. “This rule is going to be tightened in the new scheme of things,” said an official.