13 February, 2020
A. Factual Backdrop:
1. The Querist is a Company incorporated under the Indian Companies Act, 1956 and carried out business of Insurance Intermediary as a licensed agent.
2. The capital structure of the Querist showed that the entire equity shares were held by two foreign companies.
B. Queries:
3. In the above factual backdrop, the Querist Company has approached us seeking our Opinion and advise with respect to the following queries:
a. Whether the share capital structure of the Querist is compliant, vis-à-vis the existent laws;
b. If answer to query 'b', is in the negative, what would the consequences be, and further way forward;
c. Based on answer to the above queries, to identify whether answers proposed against information sought in the questionnaire of IRDA are efficacious and correct.
C. Analysis and Observation:
4. Before adverting to examining whether share capital of Querist is compliant, it would be appropriate to refer to pertinent laws and statutory prescriptions, as set out herein below:
a. Rule 8(2) of the Registration Regulations prescribes that the extent of foreign investment in the equity share capital of a Corporate Agent shall be as prescribed by the Central Government.
b. Rule 28 of Registration Regulations read with Schedule V thereof prescribes for the consequences and procedure in the event of giving of incorrect information to IRDA, including in the Application seeking registration of Corporate Agent.
c. With respect to Foreign Investment in insurance intermediaries, in exercise of power under Section 114 of Insurance Act, 1938 read with Section 2(7 A) thereof and Section 24 of IRDAI Act, 1999, the Central Government notified Indian Insurance Companies (Foreign Investment) Rules, 2015 (Foreign Investment Rules) on 19.02.2015, permitting automatic route of FDI in Insurance Companies, including Insurance Intermediaries, to the extent of 26% of their total paid up equity share capital.
The investment by FDI in addition to 26% could be made through FIPB route subject to a cap of 49% of their total equity paid up share capital. Thereafter by further amendment on 16.03.2016 the entire cap of 49% of FDI was made through automatic route.
d. The Ministry of Finance (MoF), vide another Notification of 02.09.2019 further amended inter-alia Rule 9 of the Foreign Investment Rules to prescribe that
(a) there shall be no cap to foreign equity investment for intermediaries or insurance intermediaries; and that
(b) such FDI proposal shall be allowed under automatic rote, subject to verification by the Authority (IRDAI); and further that
(c) the forein investment in intermediaries or insurance intermediaries shall comply with the requirement prescribed under Regulation 5 of the FEMA Regulations 2000 as also the provisions of SEBI (Foreign Portfolio Investors) Regulations.
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We understand that the foreign investment in the equity shares of the Querist are compliant with the requisites of FEMA Regulations as well as the concerned SEBI Regulations and therefore, compliant with the requirement of Rule 7 and 8 of the Foreign Investment Rules, 2015.
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As would reflect from the applicable Regulations/Rules, it was in the year 2015 that by way of Foreign Investment Rules the cap of foreign investment in Insurance Companies was sought to be made applicable upon the insurance Intermediaries as welt and prior to the year 2015 the foreign investment in Insurance Intermediaries was not regulated. Further, neither the Foreign Investment Rules of 2015 nor any amendment thereto prescribed any treatment or consequence with respect to the Insurance Intermediaries already having foreign investment in excess of the prescribed cap of 49%.
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Pertinently, by way of an amendment notified on 02.09.2019 the ambiguity left by the Foreign Investment Rules in relation to Insurance Intermediaries having pre-existing foreign investment more than 49%, was done away with by permitting 100% FDI through automatic route in the equity share capital of Insurance Intermediaries, including Corporate Agents.
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It would be worthy to reiterate here that the extant Rules/Regulations/ Guidelines so far, do not indicate any treatment or consequence with respect to any kind of deviation from the cap of foreign investment prescribed by Foreign Investment Rules, before amendment notification of 02.09.2019.
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This apart, the Querist has always made the required disclosure to the Authority with respect to the structure of its share capital status, therefore, we do not see any adverse consequences being attracted in relation to the foreign investment in Querist being more than the prescribed cap, including under the provisions of Rule 28 of the Foreign Investment Rules, read with Rule Schedule V thereof.
D. Opinion:
10. Based on above analysis and observations, our opinion was rendered as below:
a. That the foreign investment in the equity share capital of the Querist being 100%, the same stands compliant as on date, in view of Notification dated 02.09.2019 permitting 100% FDI in Insurance Intermediaries under automatic route.
b. In view of affirmative answer to query'a' the query 'b' is not required to be answered.
c. So far as query'c' is concerned, the response of Querist to the Questionnaire, to the effect that the Querist is in compliance with the Foreign Investment limits prescribed by Central Government for Insurance Sector, will not be incorrect, in view of FDI in Insurance intermediaries having been permitted up to 100% though automatic route.
For further information, please contact:
Manoj Kumar, Partner, Hammurabi & Solomon
Manoj.kumar@hammurabisolomon.com