[The following post is contributed by Vinod Kothari of Vinod Kothari & Co. He may be contacted at [email protected]]
The issue of
ownership and control of insurance companies in India has been in a state of
flux since early this year. While the intent of the Government was clear – to
permit FDI up to 49% in the insurance sector – the Rules framed by the Ministry
of Finance in February 2015 created a flutter with confusion about the manner
of computation of foreign ownership of Indian insurance companies. There was an
attempt to clarify the issue by an amendment carried out in early July 2015.
Now, the regulator, the Insurance Development and Regulatory Authority of India
(IRDA), has brought a new set of rules to define “Indian control” of insurance
companies. These rules, framed as Guidelines
for “Indian Owned and Controlled” insurance companies, were notified by
IRDA on October 19, 2015 (Control Guidelines).
ownership and control of insurance companies in India has been in a state of
flux since early this year. While the intent of the Government was clear – to
permit FDI up to 49% in the insurance sector – the Rules framed by the Ministry
of Finance in February 2015 created a flutter with confusion about the manner
of computation of foreign ownership of Indian insurance companies. There was an
attempt to clarify the issue by an amendment carried out in early July 2015.
Now, the regulator, the Insurance Development and Regulatory Authority of India
(IRDA), has brought a new set of rules to define “Indian control” of insurance
companies. These rules, framed as Guidelines
for “Indian Owned and Controlled” insurance companies, were notified by
IRDA on October 19, 2015 (Control Guidelines).
In the opinion of
the author, the language of the Control Guidelines is far from clear. The
Control Guidelines may lead to several changes in the manner of nomination of
directors to boards and quorum requirements for board meetings. That the
present articles of association may not have quorum requirement matching with
the Control Guidelines may actually drive several insurance companies to change
their articles of association. In addition, changes in shareholders’ agreements
may also be required because existing shareholders’ agreements may run counter
to the requirements of the Control Guidelines.
All these changes are expected to be given effect to within 3 months
from the date of notification of the Control Guidelines, and are to be
supported by an undertaking of the Chief Executive Officer and Chief Compliance
Officer, supported by a board resolution, as also amended copy of the
shareholders’ agreement, where applicable. If at all companies are advised to
implement the changes by appropriate amendment of articles of association, the
time frame of 3 months may be grossly insufficient. In short, the Control
Guidelines may create yet another flutter in the insurance fraternity.
the author, the language of the Control Guidelines is far from clear. The
Control Guidelines may lead to several changes in the manner of nomination of
directors to boards and quorum requirements for board meetings. That the
present articles of association may not have quorum requirement matching with
the Control Guidelines may actually drive several insurance companies to change
their articles of association. In addition, changes in shareholders’ agreements
may also be required because existing shareholders’ agreements may run counter
to the requirements of the Control Guidelines.
All these changes are expected to be given effect to within 3 months
from the date of notification of the Control Guidelines, and are to be
supported by an undertaking of the Chief Executive Officer and Chief Compliance
Officer, supported by a board resolution, as also amended copy of the
shareholders’ agreement, where applicable. If at all companies are advised to
implement the changes by appropriate amendment of articles of association, the
time frame of 3 months may be grossly insufficient. In short, the Control
Guidelines may create yet another flutter in the insurance fraternity.
Indian Ownership
The genesis of the
Control Guidelines is in section 2(7A) in the Insurance Act, 1938 inserted by
the 2015 amendment. This section defines an Indian insurance company as follows:
Control Guidelines is in section 2(7A) in the Insurance Act, 1938 inserted by
the 2015 amendment. This section defines an Indian insurance company as follows:
“Indian insurance company” means
any insurer, being a company which is limited by shares, and, –
any insurer, being a company which is limited by shares, and, –
(a) which is formed and registered under the
Companies Act, 2013 as a public company or is converted into such a company
within one year of the commencement of Insurance Laws (Amendment) Act, 2015;
Companies Act, 2013 as a public company or is converted into such a company
within one year of the commencement of Insurance Laws (Amendment) Act, 2015;
(b) in which the aggregate holdings of equity
shares by foreign investors, including portfolio investors, do not exceed
forty-nine per cent of the paid up equity capital of such Indian insurance
company, which is Indian owned and controlled, in such
manner as may be prescribed.
shares by foreign investors, including portfolio investors, do not exceed
forty-nine per cent of the paid up equity capital of such Indian insurance
company, which is Indian owned and controlled, in such
manner as may be prescribed.
Explanation – For the purpose of this sub-clause, the expression
“control” shall include the right to appoint a majority of the directors or to
control the management or policy decisions including by virtue of their
shareholding or management rights or shareholders agreement or voting
agreements;
“control” shall include the right to appoint a majority of the directors or to
control the management or policy decisions including by virtue of their
shareholding or management rights or shareholders agreement or voting
agreements;
(c) whose sole purpose is to carry on life
insurance business or general insurance business or re-insurance business or
health insurance business.
insurance business or general insurance business or re-insurance business or
health insurance business.
As is evident,
there are twin conditions of ownership and control in the definition above.
there are twin conditions of ownership and control in the definition above.
Indian ownership
is defined by way of Indian
Insurance Companies (Foreign Investment) Rules, 2015. Rule 2(l) of the said
Rules requires more than 50% ownership either by Indian residents, or Indian
companies which are in turn beneficially owned by Indian residents. Apparently,
there is a need to look at the second layer of investors above an Indian
company owning shares in an insurance company.
Rule 2 (l) was subsequently amended by way an amendment
dated July 3, 2015 to seemingly provide that the manner of computation of
indirect foreign investment in case of insurance companies will not be the same
as in usual cases of foreign direct investment. Irrespective of such intent,
the confusion
about reckoning indirect foreign investment in case of insurance companies
survives.
is defined by way of Indian
Insurance Companies (Foreign Investment) Rules, 2015. Rule 2(l) of the said
Rules requires more than 50% ownership either by Indian residents, or Indian
companies which are in turn beneficially owned by Indian residents. Apparently,
there is a need to look at the second layer of investors above an Indian
company owning shares in an insurance company.
Rule 2 (l) was subsequently amended by way an amendment
dated July 3, 2015 to seemingly provide that the manner of computation of
indirect foreign investment in case of insurance companies will not be the same
as in usual cases of foreign direct investment. Irrespective of such intent,
the confusion
about reckoning indirect foreign investment in case of insurance companies
survives.
In the meantime,
IRDA has come up with Control Guidelines.
IRDA has come up with Control Guidelines.
Indian Control
The overarching
theme of the Control Guidelines seems to be the same as laid down in the Explanation
to section 2(7A)(b). However, given the fact that IRDA has gone about
micro-regulating the issue of board control, particularly laying down a
peculiar requirement as to quorum, the Control Guidelines may lead to
substantial difficulties in implementation. The language of the Control
Guidelines is also suboptimal, leaving scope for interpretation issues.
theme of the Control Guidelines seems to be the same as laid down in the Explanation
to section 2(7A)(b). However, given the fact that IRDA has gone about
micro-regulating the issue of board control, particularly laying down a
peculiar requirement as to quorum, the Control Guidelines may lead to
substantial difficulties in implementation. The language of the Control
Guidelines is also suboptimal, leaving scope for interpretation issues.
Scope of Applicability
The interpretation
difficulties start from the very clause pertaining to scope of applicability.
difficulties start from the very clause pertaining to scope of applicability.
Clause 1 lists out
three cases where the Control Guidelines apply, which are connected by a
conjunctive “and”. Generally speaking, “and” is used in conjunctive sense – that
is, each of the elements specified in clause 1 must be satisfied in order to
attract the scope of applicability.
three cases where the Control Guidelines apply, which are connected by a
conjunctive “and”. Generally speaking, “and” is used in conjunctive sense – that
is, each of the elements specified in clause 1 must be satisfied in order to
attract the scope of applicability.
However, a basic
analysis of the three sub-clauses of clause 1 will indicate that the “and” is actually
an “or”. However, the three sub-clauses of clause 1 will possibly include the
entire universe of Indian insurance companies.
analysis of the three sub-clauses of clause 1 will indicate that the “and” is actually
an “or”. However, the three sub-clauses of clause 1 will possibly include the
entire universe of Indian insurance companies.
Board composition
The Control
Guidelines stipulate that a majority of directors, excluding independent
directors, shall be “nominated” by the Indian promoter/Indian investor.
Guidelines stipulate that a majority of directors, excluding independent
directors, shall be “nominated” by the Indian promoter/Indian investor.
Black’s Law
Dictionary defines a nominee thus: “One who has been nominated or proposed for
an office. One designated to act for another in his or her place.”
Dictionary defines a nominee thus: “One who has been nominated or proposed for
an office. One designated to act for another in his or her place.”
Reference to
“nomination” in the Control Guidelines cannot to be taken to mean a “nominee
director” as commonly used in corporate parlance. A nominee director is one who
is placed on the board at the discretion of the nominator. The nominator is the
one who decides who will be a director, and for how long. Any resignation of
such nominee is placed before the nominator, and removal of such nominee is
also effected by the nominator.
“nomination” in the Control Guidelines cannot to be taken to mean a “nominee
director” as commonly used in corporate parlance. A nominee director is one who
is placed on the board at the discretion of the nominator. The nominator is the
one who decides who will be a director, and for how long. Any resignation of
such nominee is placed before the nominator, and removal of such nominee is
also effected by the nominator.
Note that an
insurance company has to be a public company. In case of public companies,
section 152(6) of the Companies Act, 2013 mandates at least two-thirds of the
directors be appointed by the company in general meeting; therefore, the
question of “nomination” of a majority of directors by either the Indian
investor or the foreign shareholder, does not arise at all. The only meaning of
“nomination” in the context of the Control Guidelines is that the proposal for
the appointment of a majority of the directors will come from Indian promoters.
The actual appointment will still have to be undertaken through the regular
process of the Companies Act and Listing Regulations, including recommendation
by the Nomination and Remuneration Committee (where applicable), and approval
by shareholders.
insurance company has to be a public company. In case of public companies,
section 152(6) of the Companies Act, 2013 mandates at least two-thirds of the
directors be appointed by the company in general meeting; therefore, the
question of “nomination” of a majority of directors by either the Indian
investor or the foreign shareholder, does not arise at all. The only meaning of
“nomination” in the context of the Control Guidelines is that the proposal for
the appointment of a majority of the directors will come from Indian promoters.
The actual appointment will still have to be undertaken through the regular
process of the Companies Act and Listing Regulations, including recommendation
by the Nomination and Remuneration Committee (where applicable), and approval
by shareholders.
There is yet
another difficulty. If the number of directors on the board of a company,
excluding independent directors, is an even number, the test of control on
appointment of a majority will fail. Therefore, companies will need to ensure
that their board strength is so fixed, that the number, excluding independent
directors, is an odd number.
another difficulty. If the number of directors on the board of a company,
excluding independent directors, is an even number, the test of control on
appointment of a majority will fail. Therefore, companies will need to ensure
that their board strength is so fixed, that the number, excluding independent
directors, is an odd number.
The Control
Guidelines are completely silent about the nomination of independent directors
(IDs). Insurance companies, being substantially capitalised public companies,
are most likely to need at least two IDs. Foreign JV partners may not be well
placed to nominate IDs: therefore, IDs will most likely be identified by the
Indian investor. While IDs are expected to be independent, coupled with the
majority control over the ex-IDs board by the Indian promoter, this gives the
Indian promoter significant board strength.
Guidelines are completely silent about the nomination of independent directors
(IDs). Insurance companies, being substantially capitalised public companies,
are most likely to need at least two IDs. Foreign JV partners may not be well
placed to nominate IDs: therefore, IDs will most likely be identified by the
Indian investor. While IDs are expected to be independent, coupled with the
majority control over the ex-IDs board by the Indian promoter, this gives the
Indian promoter significant board strength.
Appointment of CEOs and other KMPs
The Control
Guidelines provide that the appointment of the CEO/Managing Director or
Principal Officer will be done by either the Indian promoter or by the Board.
Note that by virtue of section 179(3) of the Companies Act, 2013, appointment
of key managerial personnel (KMPs) will necessarily require board approval.
However, the Control Guidelines seem to be indicating that the nomination of
the CEO must be done by the Indian partner.
Guidelines provide that the appointment of the CEO/Managing Director or
Principal Officer will be done by either the Indian promoter or by the Board.
Note that by virtue of section 179(3) of the Companies Act, 2013, appointment
of key managerial personnel (KMPs) will necessarily require board approval.
However, the Control Guidelines seem to be indicating that the nomination of
the CEO must be done by the Indian partner.
The Control
Guidelines go on further to state that the nomination of KMPs other than that
the CEO – for example, the CFO, may be done by the foreign partner. The next
requirement – that such appointment will need to be approved by the Board – is
superfluous because that is anyways the requirement of the law in section 179(3).
Guidelines go on further to state that the nomination of KMPs other than that
the CEO – for example, the CFO, may be done by the foreign partner. The next
requirement – that such appointment will need to be approved by the Board – is
superfluous because that is anyways the requirement of the law in section 179(3).
Quorum
The most curious
part of the Control Guidelines is the requirement pertaining to quorum. It is
notable that special provisions with regard to quorum are a common feature of
all shareholders’ agreements (SHAs). SHAs typically provide that in any meeting
of the board, at least one representative of either side must be present to
constitute valid quorum. There are typically requirements for affirmative votes
on specific matters, irrespective of whether the matter comes before a board
meeting or not. However, it is not common for SHAs to provide the requirement
of a majority from either side.
part of the Control Guidelines is the requirement pertaining to quorum. It is
notable that special provisions with regard to quorum are a common feature of
all shareholders’ agreements (SHAs). SHAs typically provide that in any meeting
of the board, at least one representative of either side must be present to
constitute valid quorum. There are typically requirements for affirmative votes
on specific matters, irrespective of whether the matter comes before a board
meeting or not. However, it is not common for SHAs to provide the requirement
of a majority from either side.
The Control
Guidelines say: “Quorum shall mean and include presence of majority of the
Indian directors irrespective of whether a foreign investor’s nominee is present
or not.”
Guidelines say: “Quorum shall mean and include presence of majority of the
Indian directors irrespective of whether a foreign investor’s nominee is present
or not.”
Several aspects
about the provision are unclear:
about the provision are unclear:
– First, it does not state what sort of
meeting is being referred to. It might only be inferred that the meeting is a meeting
of the board. But then, given that several significant decisions are taken at
committees of boards, can it be that there is absolutely no rule applicable to
meetings of committees of boards? In many cases, decisions of a committee
virtually bind the board – for example, audit committee decisions [See section
177(8) of the Companies Act, 2013].
meeting is being referred to. It might only be inferred that the meeting is a meeting
of the board. But then, given that several significant decisions are taken at
committees of boards, can it be that there is absolutely no rule applicable to
meetings of committees of boards? In many cases, decisions of a committee
virtually bind the board – for example, audit committee decisions [See section
177(8) of the Companies Act, 2013].
– The expression “Indian director” is an
example of inappropriate language. It should mean “directors nominated by the
Indian promoter/investor”. It may be alright for a quorum requirement to
stipulate the presence of at least one director from either side, but it will
be quite challenging to require “majority” of Indian investors’ nominees. Once
again, if, excluding the independent directors, the number of directors present
from both sides is equal, it does not satisfy the requirement of the Control
Guidelines. It is mostly difficult to ensure presence of the full board in most
board meetings – so, if the board of a company has two IDs, four Indian
investor nominees, and three foreign investor nominees, the meeting will fail
the quorum if even one of the Indian investor nominees fails to attend the
board meeting, assuming that all the three foreign investor nominees either
make it to the meeting, or attend by video-conferencing. It seems odd to
require one of the foreign investor nominees to also be absent from a meeting,
if one from the Indian side is absent.
example of inappropriate language. It should mean “directors nominated by the
Indian promoter/investor”. It may be alright for a quorum requirement to
stipulate the presence of at least one director from either side, but it will
be quite challenging to require “majority” of Indian investors’ nominees. Once
again, if, excluding the independent directors, the number of directors present
from both sides is equal, it does not satisfy the requirement of the Control
Guidelines. It is mostly difficult to ensure presence of the full board in most
board meetings – so, if the board of a company has two IDs, four Indian
investor nominees, and three foreign investor nominees, the meeting will fail
the quorum if even one of the Indian investor nominees fails to attend the
board meeting, assuming that all the three foreign investor nominees either
make it to the meeting, or attend by video-conferencing. It seems odd to
require one of the foreign investor nominees to also be absent from a meeting,
if one from the Indian side is absent.
– It is a well-established rule of board
meetings that quorum is required not only to commence a meeting, but at all
times. Assuming that before the conclusion of the business, one of the Indian
investor nominees has to leave the meeting, this may cause the quorum
requirement to fail. It is also a canonical rule that an interested director on
a particular business is not counted for the purpose of quorum. It is quite
likely that one or more of the Indian investor nominees are not to be counted
for quorum for some particular matter –which breach their majority in the
board. This will be an impossible situation to handle, as even adjournment of
the board meeting otherwise required by the Control Guidelines will not redeem
the situation.
meetings that quorum is required not only to commence a meeting, but at all
times. Assuming that before the conclusion of the business, one of the Indian
investor nominees has to leave the meeting, this may cause the quorum
requirement to fail. It is also a canonical rule that an interested director on
a particular business is not counted for the purpose of quorum. It is quite
likely that one or more of the Indian investor nominees are not to be counted
for quorum for some particular matter –which breach their majority in the
board. This will be an impossible situation to handle, as even adjournment of
the board meeting otherwise required by the Control Guidelines will not redeem
the situation.
– The biggest issue is – in what way are the
requirements as to quorum are to be enforced? Section 174(1) of the Companies
Act, 2013 lays down the requirement for quorum. In case of insurance joint
ventures, there will obviously be a provision in the articles of association
which will reflect the clause of the SHA. No SHA would have ever envisaged what
the Control Guidelines provide. Hence, most articles of association of
insurance companies will not be explicitly providing what the Control
Guidelines stipulate. The question, therefore, is – is the quorum requirement
of the Control Guidelines applicable sans
any amendment of the articles of association? Or, will it be necessary or
desirable to amend the articles of association in line with the provisions of
the Control Guidelines?
requirements as to quorum are to be enforced? Section 174(1) of the Companies
Act, 2013 lays down the requirement for quorum. In case of insurance joint
ventures, there will obviously be a provision in the articles of association
which will reflect the clause of the SHA. No SHA would have ever envisaged what
the Control Guidelines provide. Hence, most articles of association of
insurance companies will not be explicitly providing what the Control
Guidelines stipulate. The question, therefore, is – is the quorum requirement
of the Control Guidelines applicable sans
any amendment of the articles of association? Or, will it be necessary or
desirable to amend the articles of association in line with the provisions of
the Control Guidelines?
Obviously, there is no answer to any of these questions. As a matter of stating the policy, having
laid down a rule about composition of board of directors, requiring the actual
majority presence in board meeting is a very curious case by itself. Control is
a question of ability, and not necessarily actual exercise. If the Indian
investor has a majority, that is sufficient control, as the ability to control
is established. Whether the Indian investor actually ensures sufficient board
presence in board meetings is like insisting upon a routine demonstration of strength,
which is unnecessary.
laid down a rule about composition of board of directors, requiring the actual
majority presence in board meeting is a very curious case by itself. Control is
a question of ability, and not necessarily actual exercise. If the Indian
investor has a majority, that is sufficient control, as the ability to control
is established. Whether the Indian investor actually ensures sufficient board
presence in board meetings is like insisting upon a routine demonstration of strength,
which is unnecessary.
Confirmation of Compliance and Time Limits
In order to ensure
that the Indian insurance companies are in compliance with the Control
Guidelines, IRDA has come out with an additional requirement of filing an undertaking
duly signed by CEO and COO. Such undertaking needs to be appended with a certified
true copy of board resolution and amended certified copy of agreement/ JV
agreement, if applicable.
that the Indian insurance companies are in compliance with the Control
Guidelines, IRDA has come out with an additional requirement of filing an undertaking
duly signed by CEO and COO. Such undertaking needs to be appended with a certified
true copy of board resolution and amended certified copy of agreement/ JV
agreement, if applicable.
Companies existing prior to issuance of Control Guidelines: comply
within a period of 3 months;
within a period of 3 months;
Companies existing post issuance of Control Guidelines: before grant
of certificate of registration.
of certificate of registration.
Conclusion
The Control Guidelines
are a step towards micro-regulation. The insurance sector is quite a sensitive
sector, and in the opinion of the author the Control Guidelines barely give out
a signal of the ease of doing business in India.
are a step towards micro-regulation. The insurance sector is quite a sensitive
sector, and in the opinion of the author the Control Guidelines barely give out
a signal of the ease of doing business in India.
– Vinod Kothari
