Registration of Indian Insurance Companies: Compliance Requirements

The registration of Indian Insurance companies is a complex process. It requires the entity to make the application in the required format under the IRDAI (Registration of Indian Insurance Companies) Regulations, 2022. Any company willing to enter the market must comply with specific compliance requirements in accordance with the relevant rules and regulations. Similarly, the company willing to enter into the insurance market must undertake specific compliance requirements as per the guidelines on the registration of Indian Insurance companies. The article will discuss the compliance requirements for the registration of Indian Insurance Companies.

Lock-in period for Equity Share Capital

The compliance requirements under the guidelines for registration of Indian Insurance Companies require that the applicant’s equity share shall be a lock-in for the period in the following manner:

Investment	In the capacity of	Lock-in period
At the time or before the grant of the R3 certificate ( Certificate of registration)	Promoter or Investor	5 years from the date of granting the R3 certificate
During 5 years after the grant of R3 certificate due to change in the shareholding pattern	Promoter or Investor	The following period, whichever is earlier: 5 years from the investment Date8 years from the date of grating R3 certificate
After 5 years but before 10 years after the grant of R3 certificate due to change in the shareholding pattern	Promoter or investor	For promoter, whichever is earlier: 3 years from the investment date12 years from the date of granting R3 certificate For an investor, whichever is earlier: 2 years from the Investment Date 11 years from the date of granting the R3 certificate.
After 10 years of the grant of R3 certificate due to change in the shareholding pattern	Promoter or Investor	For promoters, the period shall be 2 years from the investment date. For an investor, the period shall be 1 year from the Investment.

However, the authority may relax the lock-in period in case the insurer is willing to list its shares on the stock exchanges in India.

Fit & Proper Criteria for applicant, promoter and investor

The applicant willing to obtain a certificate of registration shall meet the fit & proper criteria, which will be applicable to its promoters and investors. Further, it is also required that they remain Fit & Proper even after the grant of the registration certificate. The authority will assess them based on the factors enumerated below:

• The entity’s integrity, track record and reputation.
• The financial strength of the promoter and investor.
• Ability to meet the capital requirements.
• Compliance with all applicable laws in India
• Ability to access capital or financial requirements in the future
• Business records and experience of the entity
• Due Diligence
• Interests of the general public at large and policyholders.
• Impact on the management and governance structure
• Agreement between the shareholders and its impact on control or management
• Capital structure and shareholding pattern of the promoter or investors.
• Source of funds for Investment

Compliance requirements in case of Special Purpose Vehicle

If the applicant is promoted by a Special Purpose Vehicle, it is required that the specific compliance requirements of registration of Indian insurance companies shall be fulfilled:

1. The SPV cannot issue convertible instruments of any kind.
2. No stock options or sweat equity shares can be issued to employees or directors of SPV.
3. Prior approval is needed if there is a transfer of share shares of the SPV
4. All the requirements for investment and lock-in period shall apply to the SPV.
5. The price valuation for the equity shares shall be determined based on a valuation certificate issued by two SEBI-registered Category-I Merchant Bankers^[1]. Such a certificate is required to be issued before 30 days from the allotment date of shares. The merchant banker shall provide the report to the board of directors and send a copy of such report to the shareholders along with notice of the general meeting.
6. Paid-up capital of the SPV shall be equal to, or minimum paid-up capital of the applicant under Section 6 of the act.

Compliance requirements in the case of Operating Company

If an operating company promotes the applicant, it is required that the said promoter be subject to the following due diligence compliance requirements:

1. Examination of the operating company.
2. Track record of profitability, liquidity and business operations.  
3. Ability of the promoter to raise capital for further requirements.
4. shareholding pattern of the promoter

Minimum holding by a promoter for compliance requirements

It is required that all the promoters of the insurer shall collectively hold a minimum of 50 % shares in the paid-up equity capital of the insurer. However, the said requirements can be diluted and the shareholding can go below 50% but not below 25% of the paid-up equity capital of the insurer provided the following conditions are fulfilled:

1. The insurer holds a track record of solvency ratio above the control level during 5 years immediately preceding the dilution
2. Shares of the insurers are listed on the stock exchange in India.

Compliance requirements for Investment in the capacity of the investor

The compliance requirements under the guidelines for registration of Indian Insurance Companies require an insurer to comply with the following conditions while making any investment in the capacity of an investor, whether directly or indirectly:

1. Investment by a single investor shall be less than 25% of the paid-up equity share capital of the insurer.
2. Investment by all the investors shall collectively be less than 50 % of the paid-up equity share capital of the insurer.

Number of Insurers allowed for Investment

The compliance requirements under the guidelines for registration of Indian insurance companies require the following conditions of Investment by the insurer in a respective manner:

1. Insurer can invest in any number of insurers provided the Investment is not more than 10% of the paid capital of the respective insurers.
2. If the Investment is more than 10 % but less than 25% of the insured’s paid-up capital, the Investment shall be restricted to the 2 insurers.
3. The investor shall make an upfront disclosure to the insurer if there is a one-time investment by an investor in an unlisted insurer. In this case, the promoter shall submit an undertaking with authority to invest capital in the insurer.

Additional stipulations for Investment by promoter or investor

The compliance requirements under the guidelines for registration of Indian Insurance Companies shall require that the Investment shall also comply with the following: 

1. Investment must be made from own funds, not borrowed ones.

2. The limits will be applied at the group level in case if any of the group entities or body corporate under the same management has invested in the insurer.

3. Section 6A (4) (b) of the Insurance act 1938 should apply to creating a pledge or any other kind of encumbrance over shares of an insurer.

4. If the Investment by an entity is in more than one insurer, in that case, the following condition shall be fulfilled:

1. The person must disclose the information about the common holding to all the investee insurers.
2. The person must implement a mechanism that will avoid any conflict of interest due to common equity holding.
3. The director nominated by the person shall not involve in any discussion where a conflict of interests may arise.

Compliance Criteria for Investment by the Private Equity Funds

According to the compliance requirement under the guidelines for registration of Indian Insurance Companies, the private equity funds are allowed to invest in the insurer as promoter or investor. Further, the proposed limit in respect of future capital requirements must be as per the limits specified in the placement memorandum or charter documents. The private equity funds are allowed to invest in any insurer as a promoter if they meet the following conditions:

1. The manager of the private equity funds holds 10 years of operation.
2. The funds raised by private equity funds are USD 500 million or more
3. The investible funds held by the Private Equity fund shall not be less than USD 100 Million.
4. The manager of private equity funds has invested in the financial sector in India.

Conditions for registration of transfer of Share

The compliance requirement for the transfer of Shares requires that the registration of transfer of Shares or equity capital cannot be made, which results in the exchange in the shareholding in the situations:

1. The total paid-up holding of the transferee will lead to an increase of up to 5 % of the paid-up capital of the insurance company after the transfer.
2. The nominal value of the shares to be transferred by an individual, firm, group, or constituents of a group or corporate body increases by 1 % of the paid-up equity capital of the insurance company.

However, such transfer can be registered after approval from the authority in a specified manner.

Conclusion

The IRDAI compliance requirements under the new regulation on the Registration of Indian Insurance Companies require that certain requirements are to be met by the applicant while making an application to the authority. There shall be a lock-in period of the company’s equity share for a required period of time which will ensure that the company’s solvency remains even after the grant of certificates. Further, the promoter or investor shall meet the fit & proper criteria to meet the requirement under the guidelines. Henceforth, the compliance requirement is to be met by the applicant as per the guidelines on the registration of Indian Insurance Companies issued by the IRDAI.

Read our Article: Procedure for Registration of Indian Insurance Companies under IRDAI Regulations