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'Control Guidelines' For The Indian Insurance Sector

Published on Fri, Oct 30,2015 | 16:46, Updated at Fri, Oct 30 at 16:46Source : 

By: Anuj Sah, Associate Partner, Rohan Singh, Associate and Siddhant Bhatt, Associate at Khaitan & Co

With the coming into force of the Insurance Laws (Amendment) Act, 2015 (“Amendment Act”) from December 2014, a flood of deal making was expected in the insurance sector, including the increase in foreign investment in existing Indian insurance joint ventures. However, until date, while there have been several media reports on joint venture partners deciding to proceed with stake increases, no deal has seen final closure. One of the key reasons for this was the requirement prescribed under the Amendment Act that the ‘ownership and control’ of an insurance company should vest with the Indian partner and lack of clarity on what constituted ‘Indian control’.

Several representations were made by Industry participants and foreign investors to the Insurance Regulatory and Development Authority (“IRDA”) to clarify on what constituted ‘Indian control’ and on 19 October 2015, the IRDA published guidelines on ‘Indian owned and controlled’ (“Control Guidelines”). Within 3 months from the introduction of the Control Guidelines (ie. by 18 January 2016), all Indian insurance companies and Indian insurance intermediaries (except those which generate 50% or more of their revenue from ‘non-insurance activities’) (“Insurance Entities”) are required to ensure compliance with the concept of ‘Indian owned and controlled’. This would entail, Insurance Entities having foreign investment to revisit existing shareholders’ agreements/ joint venture agreements to assess whether the Insurance Entities are truly ‘Indian owned and controlled’.

Understanding ‘Indian Control’
In the Control Guidelines, the IRDA has attempted to clarify what would constitute ‘control’. For an Insurance Entity to qualify as being Indian controlled:
(i)    Indian partners should have the right to:
a.    appoint the majority of the non-independent directors on its board of directors;
b.    appoint key managerial personnel (alternatively, the board can do this); and
c.    appoint the chairman of the board if the chairman has a casting vote;
(ii)   its board of directors should control its significant policies; and
(iii)  the quorum for its board meetings should include the presence of a majority of the Indian shareholders’ nominee directors.

This clarifies that for an Insurance Entity to qualify as Indian controlled, the right to take key policy decisions should vest with the board of directors or the Indian partner.

The Control Guidelines have recognised that the foreign partner could have basic minority protection rights and such rights would not constitute ‘control’ being in the hands of the foreign partner. This has been elucidated through a specific provision which permits the foreign partner to have the right to have its nominee director present at all board meetings to constitute valid quorum. Further, it has been provided that the requirement of having the majority of directors appointed by the Indian partner extends only to non-independent directors. This implies that the independent directors will be ‘independently’ appointed and will not owe allegiance to any particular group of shareholders, but rather will act in the best interest of the company.  

The Question of Affirmative Vote Rights
While, the regulator has provided direction on how significant policy decisions of an Insurance Entity are to be undertaken, no guidance has been provided on how the IRDA would treat standard minority protection rights which are generally accorded through affirmative vote rights (“AVRs”). AVRs essentially stipulate that certain pre-determined matters would be undertaken with the prior consent of the minority shareholder.

In its classic sense, AVRs are not meant to provide a minority investor control over the policy decisions of the company, but rather provide a mechanism for such investor to protect its interests. These are in the nature of negative rights (which gives the ability to block a decision) as distinguished from positive rights which can be used to implement a decision. AVRs were dealt with in great detail in the decision of the Securities Appellate Tribunal (“SAT”) in the Subhkam Ventures decision (order dated 15 January 2015 in Appeal No 8 of 2009), in which the SAT overruled SEBI’s order and observed that certain AVRs (which were reviewed in this case) were merely protective rights, and did not constitute ‘control’. However, in the appeal from the SAT decision, the Supreme Court held that the SAT decision would not be treated as a precedent.  It is widely expected that the IRDA’s views on AVRs would be in line with the decision of the SAT in the the Subhkam Ventures decision. However, a careful review by the regulator of these rights can be expected to ensure that the rights are truly minority protection in nature and do not provide back door ‘control’ to the foreign partner.

The Control Guidelines, while remaining silent on AVRs, are still refreshing in the sense that the IRDA has taken a welcome step to provide greater clarity on what it expects to constitute ‘Indian control’. It is clear that the IRDA will not permit the foreign partner to have any rights which are in the nature of controlling significant policy decision of the Insurance Entities. While there is a lack of clarity on AVRs, in our view, given the background of existing foreign investors having these rights in several existing insurance joint ventures, it appears likely that the IRDA may permit AVRs as long as they are classic minority protection in nature and do not cross the thin line of becoming intrusive (and thereby fall within the domain of control). We expect that the deal making activity in this sector is finally set to take off.

The views of the authors are personal and should not be considered as those of Khaitan & Co. For any further queries or follow up please contact

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