PE firms can now promote insurance companies, but with a lock-in of 5 years

Insurance Regulatory and Development Authority of India (IRDAI) on Wednesday approved a proposal to allow private equity (PE) firms to promote insurance companies. However, there will be a lock-in of five years.

"We will allow PE/VC to become promoters of insurance companies with a five year lock-in period. However, they can only do so through a special purpose vehicle (SPV) and abide by the Indian-owned and controlled guidelines," a senior IRDAI official said adding that, "Further, they should commit that whatever additional capital needs are there, will be fulfilled."

Moneycontrol had earlier reported that IRDAI has proposed a board meeting on November 29 to seek approval for the proposal.

As per the Insurance Laws (Amendment) Act 2016, all insurance companies in India are required to have 51 percent stake by Indian promoter while foreign partner can hold 49 percent. The law also states that Indian management control will have to be maintained in these companies. This means all major board matters, appointments and strategy decisions need to have majority approval by Indian shareholders.

The guidelines are expected to be issued next week as early as Monday. Those who are interested can apply thereafter.

In the board meeting held on Wednesday, two R1 or first stage of licence applications of Jiva Health and O Care Health (which will also offer specialised dental solutions) — standalone health insurance operations were approved. Further, Reliance Health Insurance's second stage or R2 application was also approved.

Allianz Global's reinsurance branch licence was also given the preliminary approvals.

In September 2017, IRDAI Chairman TS Vijayan had said that short-term investments including those by PE firms are under discussion and said that the regulator may arrive at a decision in a month or so.

This will mean that PE firms can approach IRDAI to promote insurance companies. The exit strategies can also be decided appropriately.

Traditionally, PE firms have an entry and exit strategy for companies that they invest in. To ensure that the stability of an insurance company is not compromised, the regulator will bring out detailed guidelines giving out circumstances under which a PE can enter or exit an insurer.

As per current regulatory norms, firms holding 10 percent or more in an insurance company are classified as promoters while those holding less than that are called investors. PE-VC firms, unlike promoters, invest in companies with healthy business prospects and exit when the returns do not correlate to the investments.