Foreign partners' role in insurance ventures to face tougher scrutiny

IRDAI seeks to curb their veto power, board decisions and product strategy, may also insist on Indian chairman

Foreign partners' role in Indian insurance companies will have to face a tougher test of the regulator. Insurance Regulatory and Development Authority of India (IRDAI) is not only looking to limit their role with respect to veto power, board decisions and product strategy, the chairman would also require to be Indian.

Regulatory officials said that the aim is to have Indian promoters and stakeholders control the day-to-day functioning of the company. "While the foreign partners will play a key role with respect to suggesting newer strategies for growth, it would require the Indian partner's approval. The onus is on us to ensure management control rests fully with Indian not only in the management structure but also in the way business is done," an official said.

Existing shareholder agreements will have to be completed re-written to ensure that no wording in the agreement gives any additional powers to the foreign partner. At present, foreign partners do enjoy rights including rights of voting and board membership in proportion to their stake. Therefore, even when their stake increases, they would not have any addition of rights.

Here, industry chief executives said that apart from a hike in stake, there would be no significant gain for the foreign partner. "While large global players are committed to their India businesses for a long term, there is some displeasure of them not getting enough voting or veto powers," said the chief executive of a large private life insurance company.

Since the Insurance Laws (Amendment) Act said that all insurers will have 'Indian management and control', regulatory officials said that this would mean no 'exclusivity' of foreign promoters in areas like CEO appointments, board positions or even company decisions on strategy and products.

While the regulator may not bring out guidelines on Indian management and control, they will review the agreements in detail when they come in for approval for stake hike from 26 per cent to 49 per cent. Sources said that companies even have to make changes in the existing agreement if the regulator finds any 'control' resting with the foreign partner.

Indian management and control has been a bone of contention of the insurance companies. While foreign partners were not pleased with the inclusion of this clause at the last moment in the Insurance Act, they have been awaiting clarifications on what rights would be given to them.

Hence, when a foreign partner applies for stake hike in an insurer, industry officials said that apart from a higher stake in the company, they would not gain anything else with respect to the day-to-day running of its functions.

The Insurance Act allowed insurers to have foreign investment as FDI for up to 49 per cent, with Indian management control. However, it did not define what this would mean. This required IRDAI to clarify what its stand would be on this issue and how they interpreted this provision.

There was also confusion over Foreign Institutional Investors (FII) holdings in Indian promoters and whether that would violate Indian management control. However, IRDAI published the clarification by the department of financial services that holdings of equity in an Indian promoter company held by foreign institutional investors, other than the foreign promoters of the applicant and their subsidiaries and nominees will not be part of foreign direct investment (FDI). This, earlier seen as violation of Indian management control, had come as a relief to several Indian entities that had a high FII holding.