By Venkatachari Jagannathan

Chennai:(IANS) India’s insurance regulator with its guidelines on “Indian Owned and Controlled” insurance companies has plugged loopholes to effectively hand management control to Indians, say experts.

They however wonder whether the Insurance Regulatory and Development Authority of India’s (IRDAI) guidelines issued on Monday could override rules framed under insurance laws or be in conflict with the Companies Act.

“With majority of the directors, excluding independent directors, nominated by Indian promoter/investor and appointment of key management persons being approved by board where majority of the directors are nominated by Indian promoters, the control of an insurance company is with Indians,” a senior official with a private life insurer told IANS on Tuesday.

As per the IRDAI guidelines issued on Monday, appointment of an insurance company’s CEO or managing director should be through board of directors or Indian promoters or Indian investors.

The life insurance official also said the guideline provides that the board should exercise control over significant policies.

The IRDAI guidelines specify control over the company could be exercised through shareholding, management rights, shareholders agreement, voting agreements or any other manner as per applicable laws, and applies to both insurers in which the foreign partner plans to increase its stake, or doesn’t want to do so.

K.K. Srinivasan, a former member of IRDAI, said the guidelines along with the FDI Rules notified by government and the revised FIPB guidelines considerably tighten up the ambiguities prevailing earlier, but what is most important is that it applies to the whole sector, not just companies.

“Shareholder agreements in the nascent stage of 26 percent FDI that may have provided for management control to foreign partners will now have to be rewritten. Also with RBI notifying norms for fair and reasonable valuation (pricing) for foreign partners hiking their stake, old agreements with pre-fixed pricing may go for a toss,” Srinivisan told IANS.

All insurers have to file compliance of the “Indian owned and controlled”, signed by the CEO and the chief compliance officer after the company board passes a resolution to this effect, with the IRDAI along with certified copies of other necessary documents giving effect to this purpose. This has to be done within three months – extendable by IRDAI by another three months.

On the guidelines being silent on amending articles of association, an official told IANS: “Insurers where foreign promoters are not planning to hike their stakes and where there are no foreign partners, the Articles of Association have to be amended and filed with IRDAI.”

Likewise in cases where foreign promoters want to increase their stakes, the articles would have to be amended and filed after getting the in-principle approval for the stake hike, he said, adding the amended shareholder agreement has to be filed first.

The guidelines also stipulate that quorum for board meetings will be presence of the majority Indian directors, and are applicable to insurance intermediaries having 50 percent or more of their revenue from it.

However legal experts are not comfortable with all of the guidelines.

Noting that as per the amended Insurance Act, power has been conferred on the central government to prescribe rules for determining “Indian Owned and Controlled” and government has done so, Supreme Court advocate and company and insurance law expert D.Varadarajan told IANS that “under these circumstances, one wonders whether the latest ‘guidelines’ issued by the IRDAI in this behalf in purported exercise of its powers under section 14(1) of the IRDAI Act is appropriate?”

He also held the quorum requirements as per the guidelines contrary to those provided in the Companies Act, 2013 in some cases such as quorum, while they follow its provisions in other matters, such as adjournment.

Srinivsan also said: “The impact of this tightening remains to be seen. Foreign partners who may have been expecting management control or favourable (read: low) valuation may rethink enhancing their stake to 49 percent. New entrants may also rethink their entry. This may affect adversely the FDI inflow.”

He said the idea of Indian management and control is okay only long as the FDI is capped at 49 percent, and may have to undergo a change if the FDI is enhanced to 50 percent or more.