IRDA

IRDAI Notified New Regulation on Other Forms of Capital, 2022

The Insurance Regulatory Development Authority of India is the regulatory body in India that protects the interest of the holders of Insurance Policies for the purpose of regulating, promoting and ensuring the growth of the insurance Industry. It monitors the investment of funds by insurance companies and governs the maintenance of the solvency margin. It also judges the disputes between insurers and insurer’s intermediaries. The IRDAI, in order to provide a better framework for the investment of funds, has issued a circular on “Insurance Regulatory and Development Authority of India (Other Forms of Capital) Regulations, 2015″, dated 13^th November 2015. To provide a practical framework for issuing other forms of capital by Insurers other than a foreign Re-insurers Branch has issued a superseding regulation on other forms of capital dated 5^th December 2022. The present article will cover the minimum reporting and disclosure requirement under the new regulation on other forms of capital alongside the provisions covered in the new regulations.

What is the enforcement period of the new regulations of other forms of capital by IRDAI?

The new regulation on other forms of capital by IRDAI will supersede the earlier regulation “Insurance Regulatory and Development Authority of India (Other Forms of Capital) Regulations, 2015”. Further, the new regulation will be valid for 3 yearsfrom the publication date in the official gazette.

What are the key definitions under the new regulation on other forms of capital by IRDAI?

The key definitions under the new regulation are:

• Other forms of Capital: The other forms of capital will include the following types of instruments issued by the insurer:

                a. Preference share capital

                b. Subordinate Debt

• Preference Share Capital: It connotes the same meaning as defined in explanation (ii) to Section 43 of the Companies Act, 2013.
• Subordinated debt: The subordinated debt will imply:

                a. Debenture as defined under Section 2 (30) of the Companies Act 2013.

                b. Any other debt instrument permitted by the authority

What are the qualifications under the new regulation on other forms of capital by IRDAI?

Under the new regulation on other forms of capital, the following criteria are to be met:

• Fully Paid Up: The instrument shall have been issued and fully paid up in cash.
• Seniority of claims: The seniority of the claim should be governed in the following order:

a. The claims of the preference shareholder are superior to the equity shareholder but subordinate to the policyholders and all creditors.

b. the claim of the holders of subordinate debt shall be superior to the preference shareholder and equity shareholder but subordinate to the policyholders and all the creditors.

c. the claim of the policyholders shall be senior to the claims of all the creditors.

• Security: The instruments issued shall neither be secured nor covered by a guarantee of the insurer that will legally enhance the seniority of the claims as against the claims of the policyholders and creditors.
• Maturity period: The maturity period of the instruments shall be as under:

                a. Preference share capital: The maturity and redemption period shall be not less than:

I. Life Insurance Companies, General Insurance Companies and Reinsurance Companies: 10 years:

II. Health Insurance: 7 years

b. Subordinate Debt: The issue of subordinated debt should be perpetual and the maturity or redemption period shall not be less than:

I. Life Insurance Companies, General Insurance Companies and Reinsurance Companies: 10 years:

II. Health Insurance: 7 years

What are the conditions for issuance under the new regulation on other forms of capital by IRDAI?

The conditions of the issuance of capital under the new regulation on other forms of capital by IRDAI are:

• Fully paid/ Non-convertible/ unsecured: All the instruments shall be fully paid, non-convertible and unsecured.
• Conditions for investment by foreign investors: Investment by foreign investors, including foreign portfolio Investor and Foreign institutional investors, shall be subject to the following conditions:
  • The overall investment by the foreign investor shall be, at most, the limit specified in the FEMA Act 1999^[1].
  • The issuance of preference shares and subordinated debt shall comply with the pricing guidelines.
  • The terms and conditions specified by the SEBI shall comply with the instruments.
  • Ensure compliance with all the directions, notifications and orders etc., issued by RBI.
  • Ensure compliance with the direction issued by the central government in respect of Foreign Direct Investment (FDI). 
  • The insurer shall list their subordinate debt only on the Indian Stock exchange.
• No incentive for early redemption: The issuer of preference shares and holders of the subordinate debt shall not receive any incentive for early redemption of the instrument.
• Rate of Dividend/interest:  The rate of dividend and interest payable to preference shareholders and subordinated debt holders, respectively, may be based on a fixed rate or floating rate. The rate should be determined with reference to a market-determined rupee interest benchmark rate.
• Payment of dividend and charge of interest: The dividend on preference share shall be distributed from the distributable profit of the shareholder and the interest on subordinated debt should be charged to the P & L account. On the failure of the above actions, no restriction will be imposed on the insurer except for the payment of dividends to equity shareholders.
• Solvency of insurer: The insurer’s solvency shall be at least at the control level of solvency.
• Compliance with regulatory requirements: The insurer shall comply with all the rules and regulations specified by the authority and under corporate laws.

What is the prior approval requirement under the new regulation on other forms of capital by IRDAI?

Under the new regulation on other forms of capital by IRDAI, the insurer is required to take prior approval of the authority while paying a dividend for preference shares and interest on the subordinate debt for any financial year provided:

• The solvency of the insurer is at the minimum control level of solvency.
• The impact of payment results in falling below the level of the control level of solvency.
• The impact of payment of interests results in a net loss or increase in the net loss.

What are the reporting requirements?

As per the new regulation on other forms of capital by IRDAI, the issuer shall, within 15 days, file a report to the authority from the date of allotment. The report will contain all the details of the funds raised through the issuance of the instruments, including:

• Total raised amount
• Name, address & nationality of the subscriber
• Purpose of the issue
• Type & nature of the instrument issued
• Fixed or Floating Rate of Interest
• Rate of Dividend
• Rate of premium
• Confirmation that all laws have complied
• Copy of application letter or offer or information memorandum along with term sheet

What is the classification in the balance sheet?

The issuer must prepare the balance sheet as per the IRDAI (Preparation of Financial Statements and Auditor’s Report of Insurance Companies). The classifications under the balance sheet for the instruments shall be as under

• Preference Share Capital: Under the head “Share Capital”
• Subordinated debt: under the head “Borrowings”
• In case of any instrument where premium is received: under the head “Securities Premium”

What are the disclosure requirements under new regulations on other forms of capital by IRDAI?

The new regulation on other forms of capital requires the insurer to disclose the amounts raised through the issue of instruments in addition to the gist of terms of issue and maturity or redemption period in the notes to accounts forming part of the annual financial statements.

What are call back of instruments under the new regulations?

The new regulation on other forms of capital requires the insurer not to issue any instruments on “Put Option”. However, the issuer may have the option to issue the instruments with the “Call option” provided:

1. The instrument has run for at least 5 whole years.
2. Insurers may exercise the call option without the prior approval of the authority.
3. The authority is required to undertake the solvency position of the insurer and future business plan both at the time of exercising the call option and after exercising the call option.
4. The insurer shall, within 15 days, exercise the call option from the date of communication of the exercise of the call option.

Moreover, it is pertinent to mention that in any event of non-payment of interest and redemption amount of the subordinated debt by the insurer shall not imply any default and is not qualified to be included in any event of default intimation.

Who can subscribe to the instruments under the new regulations?

The following persons can be subject to the following:

1. Indian promoters under IRDAI (Registration of Indian Insurance Companies) Regulations 2022
2. Indian Investors under IRDAI (Registration of Indian Insurance Companies) Regulations 2022
3. Foreign Investors under Insurance Companies Foreign Investment) Rules 2015
4. Any other person approved by the authority.

How to invest in other performs of capital by other insurers?

The insurer may invest in the other forms of capital issued by another insurer provided:

1. Such an investment will be classified as an “other Investment”
2. Such an instrument must comply with the IRDAI (Investment) Regulation 2016.
3. Such investment will not qualify as a permissible asset for determining the control of solvency.
4. Insure cannot invest in another insurer’s instrument if they have a common promoter.

Can the insurer grant a loan against the security of the instruments?

The insurer is not eligible to grant any loans against the instruments issued by themselves.

What is the limit for other forms of capital?

The total amount of instruments under other forms of capital combined shall be lower than the following:

1. 50 % of an insurer’s total paid-up equity share capital and securities premium.
2. 50 % of the insurer’s net worth.  

What is the responsibility of the board of the insurer?

The responsibilities of the board of insurer will include the following:

• Preference Shares: The responsibilities will include:

a. Resolution from the board of directors

b. Special Resolution passed in the General Body Meeting of the shareholders authorising the issue of preference shares.

• Subordinated Debt: A resolution passed by the board of directors of an insurer

• The board of directors should ensure that it is necessary to issue other forms of capital to meet its capital or solvency requirement.

• The board of directors shall ensure:

a. Compliance with the regulations

b. Interest Rate or Coupon rate for Subordinated Debt

c. Dividend Rate for Preference Shares

How amortisation of the instruments takes place for the purpose of computing solvency?

The instruments issued as “other forms of Capital” shall be computed towards the “Available Solvency Margin”. The instruments shall be subject to progressive haircut for computing “Available Solvency Margin” on a straight line basis in the final 5 years before the maturity. The outstanding balance could be determined for inclusion of capital for the instruments issued under these regulations in the following way:

Years till Maturity	Capital Percentage included in the Available Solvency Margin
5 years or more	100%
Less than 5 Years or 4 Years	80%
Less than 4 years or 3 years	60%
Less than 3 years or 2 years	40%
Less than 2 years or 1 year	20%
Less than 1 year	0%

Conclusion

The IRDAI, in order to provide the insurer with a way to raise funds, has provided an opportunity to the insurer to issue other forms of capital. The insurer can issue preference shares and subordinated debt to raise funds in the market. Moreover, the funds raised shall be fully paid up, non –convertible and unsecured. The new regulation on other forms of capital has modified the prior approval requirement, which necessitates the issuer to be at a control level of solvency before issuing the instruments in the market. Further, the reporting requirements shall also include other details discussed above in addition to the details of funds.

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