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The Reserve Bank of India (RBI) has barred core investment companies from the insurance broking business and has laid tighter conditions for entering the insurance business.
The guidelines say a systemically important core investment company (CIC-ND-SI) is a non-banking financial company (NBFC) with an asset size of Rs 100 crore and above, with not less than 90 per cent of net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies.
RBI has said a CIC should have registered net profit continuously for three years if it wanted to enter the insurance sector. The risks involved in an insurance business should not get transferred to the CIC.
“CICs cannot enter into the insurance business as agents. CICs that wish to participate in the insurance business as investors or on risk participation basis will be required to obtain prior approval of the Reserve Bank (which) will give permission on a case-to-case basis, keeping in view all relevant factors,” said RBI.
At present, NBFCs venturing into insurance are governed by guidelines in this regard. RBI said in view of the unique business model of CICs, it has been decided to issue a separate set of guidelines for their entry into insurance. “While the eligibility criteria, in general, are similar to that for other NBFCs, no ceiling is being stipulated for CICs in their investment in an insurance joint venture. Further, it is clarified that CICs cannot undertake an insurance agency business,” it added.
This move comes at a time, when some NBFCs have entered into agreements to purchase stake in insurance companies. In March, Pantaloon Retail decided to sell 22.5 per cent of its stake in Future Generali India Life Insurance to Industrial Investment Trust Limited (IITL). IITL is an investment company registered as an NBFC (non- deposit taking) with RBI and is listed on the Bombay Stock Exchange and National Stock Exchange. The IITL Group has subsidiary companies in real estate, infrastructure, stock broking and insurance broking.
RBI said CICs exempted from registration with RBI do not require prior approval, if they fulfill all the necessary conditions of exemption and their investment in an insurance joint venture would be guided by Insurance Regulatory and Development Authority (Irda) norms.
To be eligible to set up a joint venture company for undertaking an insurance business with risk participation, RBI said the CIC should have minimum owned funds of Rs 500 crore. Further, the level of net non-performing assets shall be not more than one per cent of the total advances and the record of the performance of the subsidiaries, if any, of the CIC concerned should be satisfactory.
RBI has also advised the CIC to comply with all applicable regulations including CIC Directions, 2011. “Thus, CICs-ND-SI are required to maintain an adjusted net worth which shall be not less than 30 per cent of aggregate risk-weighted assets on the balance sheet and the risk-adjusted value of off-balance sheet items,” it said.
Further, it said an NBFC (in its group/outside the group) would normally not be allowed to join an insurance company on a risk participation basis and, hence, should not provide direct or indirect financial support to the insurance venture.
Within the group, it said CICs may be permitted to invest up to 100 per cent of the equity of the insurance company on either a solo basis or in a joint venture with other non-financial entities in the group. This would ensure that only the CIC, either on a solo basis or in a joint venture with the group company, is exposed to insurance risk and the NBFC within the group is ring-fenced from such risk.
In a case where a foreign partner contributes 26 per cent of the equity, with the approval of Irda/Foreign Investment Promotion Board, more than one CIC may be allowed to participate in the equity of the insurance joint venture.
NEW NORMS
- Core investment companies (CIC) have been barred from insurance broking business
- RBI says a core investment company (CIC) should have registered net profit continuously for three years if it wants to enter the insurance sector
