Risk Management Function of NBFCs – A Need to Integrate Operational Risk Management & Resilience 

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An examination of the RBI Guidance Note on Operational Risk Management and Resilience

Subhojit Shome & Archisman Bhattacharjee | finserv@vinodkothari.com

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12th Securitisation Summit

The who’s who of structured finance is joining the 12th edition of our flagship event, the Securitisation Summit on May 15, 2024, in Mumbai. Be shoulder-to-shoulder with leading originators, investors, lawyers, rating agencies, consultants, regulators, mediators, market makers, and everyone else who matters.

For details of the event and to book your seat, please visit our Summit page – HERE

Agenda – 12th Securitisation Summit | May 15, 2024

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Relinquishment of source of profit in favour of an RP: also an RPT

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Mahak Agarwal | corplaw@vinodkothari.com

The broad spectrum of the definition of Related Party Transactions (RPTs) under the Listing Regulation, continues to be an error prone area in terms of compliance. A recent SEBI ruling has further strengthens this aspect where the phrase ‘transfer of resources, services or obligations’ has been explained in an extremely new dimension with a commendable insight from the authorities which again shows that the regulators can no more be restricted by the imaginary boundaries placed by the corporates when it comes tightening the loose ends of corporate governance.

This article delves into the basis which the Regulators considered for concluding a mutual understanding and agreement between related parties to be an RPT notwithstanding the  contention of the company. The essential question of law involved in this case was whether the allocation of certain products and geographic areas between RPs constitutes an RPT. The article contains our analysis of SEBI’s order in the matter affirming the said stand.

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AIFs cannot be used as regulatory arbitrage

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SEBI mandates ongoing due diligence for investors and investments made by AIFs

-Vinita Nair, Senior Partner and Lavanya Tandon, Executive | corplaw@vinodkothari.com

Background

Alternative Investment Funds (‘AIFs’), presently around 1324 registered with SEBI, channels risk capital to enterprises, including unlisted companies, as well as cater to sophisticated investors. One of the major concerns highlighted by SEBI was that while the AIF industry had registered robust growth over the years, a number of instances of AIFs being structured to facilitate circumvention of different financial sector regulations was witnessed, thereby eroding trust in the system.

SEBI had raised following concerns in its Consultation Paper issued in January, 2024:

  1. Evergreening of loans by regulated lenders:

A regulated lender would subscribe to a junior class of units of an AIF, and the AIF in turn would fund the lender’s stressed borrower. The borrower would use these funds to repay the loan given by the regulated lender, without disclosure of any stress. The stressed asset in the books of the regulated lender would in effect be replaced with the investment in the junior class units of an AIF.

  1. Circumvention of FEMA norms:

Some foreign investors set up AIFs with domestic managers/sponsors to invest in sectors prohibited for FDI, or to invest beyond the allowed FDI sectoral limit. Further, foreign investors may set up AIFs to invest foreign money in debt/debt securities where foreign investment is envisaged through the FPI/ECB route.

  1. Circumvention of QIB regulations:

In terms of SEBI (ICDR) Regulations, 2018 all AIFs are designated as QIBs. QIBs are generally perceived as large, regulated, sophisticated and informed institutional investors. Certain AIFs have single or very few investors, at times belonging to same investor group, and avail benefits available to QIBs (for e.g. investing in IPO under QIB quote) which would otherwise not be available to them. It also permits otherwise ineligible entities/ persons to influence the price discovery process in public market in the garb of AIF.

SEBI also recorded 40+ cases wherein the structure of AIF had been abused and used to circumvent extant financial sector regulations. Read our analysis in the article ‘AIFs ail SEBI: Cannot be used for regulatory breach’ dated January 31, 2024.

Last year, SEBI had issued ‘Guidelines with respect to excusing or excluding an investor from an investment of AIF dated April 10, 2023 that empowered an AIF to excuse its investor from participating in a particular investment in the following circumstances:



Figure 1: Circumstances to excuse an investor of AIF

Further, RBI had also barred all regulated entities (REs) with respect to their investments in AIFs, discussed in our article.

Present Amendment

Accordingly, in order to restore the trust and prevent such circumvention in the AIF ecosystem and to facilitate ease of doing business, it was proposed introduce a general obligation in the existing AIF regulations that would require AIFs, managers and their key management personnel (‘KMPs’) to ensure that their operations and investments do not facilitate circumvention of regulations administered by any financial sector regulator.
Subsequent to receipt of public comments on the Consultation Paper, the proposal to mandate due-diligence of investors and each of the investments made by the AIF was approved in the SEBI Board meeting held on March 15, 2024. SEBI notified SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2024 effective from April 25, 2024 amending Reg. 20 of the SEBI (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’) dealing with general obligations thereby requiring every a. AIF, b. investment manager of the AIF, c. KMP of the AIF, and d. KMP of the investment manager, to exercise specific due diligence with respect to their investors and investments in order to prevent facilitation of circumvention of such laws as may be specified by SEBI from time to time

Scope of laws covered under the ambit of due diligence

‘Laws’ here include Acts, Rules, Regulations, Guidelines  or  circulars  framed thereunder that are administered by a financial sector regulator, including those administered by SEBI. SEBI shall prescribe a framework under the above-mentioned regulation, by way of issuance of circular, to address circumvention of specifically identified financial sector regulations

As indicated in Annexure A of the SEBI Board meeting agenda the list of identified specific  regulations of financial sector regulations for which specific due-diligence checks shall be  formulated  to  prevent  AIFs facilitating circumvention of the same comprises of following:

Figure 2: List of laws for due–diligence 

Due diligence requirement – one-time or ongoing?

As discussed in the SEBI BM Agenda, the  purpose  of  the  due-diligence  check  is  to  prevent  facilitation  of any circumvention of provisions of financial sector regulators, which cannot be a time specific check. An entity who intends to circumvent can design the structure in such a way that, at a later date post investment, it acquires the units  of  AIFs  post  investment,  such  as  buying  the  units  of  an  existing investor or by acquiring control over the existing investor entity, as per prior arrangement.  Accordingly, it has been indicated that due diligence around investors and investments will be an ongoing one.

Applicability of due diligence – prospective or retrospective?

It was suggested that any proposed due diligence  criteria  should  only  be  applicable  in  relation  to  prospective investments and SEBI should grandfather investments made as on date. Further, it was also discussed that in  case it has been ascertained that the AIF has  facilitated circumvention with respect to the investments already made, the manager may be mandated to report the same to SEBI or the respective financial sector regulator for examination.

Standards for due-diligence

In order to ensure that the due-diligence requirements are not open-ended or subject to  interpretation, the specific implementation standards for verifiable due diligence to be conducted on investors and investments of AIFs will be formulated by the pilot Industry Standards Forum for AIFs, in consultation with SEBI.

Conclusion

The present amendment lays an onerous burden on the AIF, manager and KMP of the AIF and the manager. The obligation of on-going due diligence will result in a compliance burden. It will be worth watching to see the standards for due diligence framed by the industry forum in line with ‘trust, but verify’ principle and ascertain the actionable arising therefrom.

Our other resources:

  1. AIFs ail SEBI: Cannot be used for regulatory breach
  2. RBI bars lenders’ investments in AIFs investing in their borrowers
  3. Some relief in RBI stance on lenders’ round tripping investments in AIFs

Proposals approved in SEBI Board Meeting held on April 30, 2024

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Laveena Gajwani and Garima Chugh | corplaw@vinodkothari.com

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Lend, Recover, Replenish: A guide to revolving lines of credit

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“Chivalry is like a line of credit. You can get plenty of it when you do not need it.”

— Nellie L. McClung

Dayita Kanodia | Finserv@vinodkothari.com

In the realm of financial management, having access to a flexible and readily available source of funds can be a game-changer for individuals and businesses alike. One such financial tool that offers this flexibility is a revolving line of credit. Often misunderstood or overlooked, revolving lines of credit are versatile financial instruments that can provide quick access to funds when needed.

A revolving line of credit is a type of loan arrangement that provides borrowers with access to a predetermined amount of funds, which they can borrow, repay, and borrow again as needed. Unlike traditional term loans, where you receive a lump sum upfront and repay it over a set period with fixed payments, a revolving line of credit offers ongoing access to funds that can be drawn upon at any time, up to the credit limit.

Revolving line of credits has been defined as a committed loan facility allowing a borrower to borrow (up to a limit), repay, and re-borrow loans.These are also known as revolving credit facilities, replenshing loans, revolving loans,  or just revolver. 

How Does it Work?

When one opens a revolving line of credit, there is an approval for a certain credit limit based on factors such as creditworthiness, income, and other financial obligations. Once approved, funds can be accessed from the credit line as needed, either by writing checks, using a debit card, making online transfers, or withdrawing cash, depending on the terms of the agreement.

The line of credit is drawn down as disbursements occur. However, the limit is reinstated to the extent repayment is made by the borrower. Obviously, the borrower is free to repay the whole or a part of the limit anytime, and there is no question of any prepayment charge. 

It is not as though a revolving line of credit will continue to revolve all the time – the lender may set a renewal date, and if the facility is not renewed, the lender may convert it into either an instalment credit, or one payable in one or more tranches at a defined time. During the period the facility remains revolving, the borrower services interest.

It is also important to note that during such time, and for such amount, the facility is not used not used fully, the lender still keeps a commitment to lend alive, which has both liquidity burden as well as regulatory capital charge for the lender. Therefore, it is perfectly okay for a lender to provide for a commitment charge for the unutilised facility amount. 

Features of Revolving Lines of Credit

  • Revolving Nature: Unlike traditional term loans, revolving lines of credit allow borrowers to repeatedly borrow and repay funds without the need to reapply for a new loan each time.
  • Interest on Utilized Amount: Interest is typically charged only on the amount of credit actually used, rather than on the entire credit limit. This can result in lower interest costs for borrowers who do not fully utilize their credit line.
  • Variable Interest Rates: Interest rates on revolving lines of credit may be variable, meaning they can fluctuate over time based on market conditions. This can be advantageous if rates decrease but may pose risks if rates rise.
  • No Fixed Repayment Schedule: Unlike term loans with fixed monthly payments, revolving lines of credit typically have no fixed repayment schedule. Borrowers can repay the borrowed amount on their own timeline, as long as they make at least the minimum required payments.
  • Credit Renewal: As long as the borrower meets the terms and conditions of the credit agreement, revolving lines of credit can be renewed indefinitely, providing ongoing access to funds.

Lines of credit and its types

The US Federal Reserve has distinguished between revolving and non-revolving lines of credit. It says, 

“Revolving credit plans may be unsecured or secured by collateral and allow a consumer to borrow up to a prearranged limit and repay the debt in one or more installments. Credit card loans comprise most of revolving consumer credit measured in the G.19, but other types, such as prearranged overdraft plans, are also included. Nonrevolving credit is closed-end credit extended to consumers that is repaid on a prearranged repayment schedule and may be secured or unsecured. To borrow additional funds, the consumer must enter into an additional contract with the lender.”

Credit can be classified as:

Revolving Credit: A fixed line of credit is determined from where draw down take place. The line of credit then gets reinstated on repayment by the borrower.

Non-Revolving Credit: They provide borrowers with access to funds up to a predetermined credit limit which does not get reinstated on repayments being made. To borrow additional funds, a new contract has to be entered into.

Installment Credit: Installment credit involves borrowing a specific amount of money upfront and repaying it over a set period in equal installments, typically including both principal and interest.

Non-installment Credit: In case of non-installment credit, repayment does not happen in equal installments over a period of time but there is generally a bullet repayment made by the borrower.

Types of revolving lines of credit

Revolving lines of credit come in various types, each tailored to meet specific needs and circumstances:

Personal Revolving Line of Credit: 

This type of credit is designed for individual consumers and can be used for various personal expenses, such as home renovations, unexpected medical bills, or debt consolidation. Personal revolving lines of credit offer flexibility in borrowing and repayment, allowing individuals to access funds as needed.

Working Capital Revolving Line of Credit: 

Businesses often use this type of credit to manage cash flow, finance day-to-day operations, purchase inventory, or cover short-term expenses. Working capital revolving lines of credit provide flexibility for businesses to access funds when needed and repay them as cash flow allows, helping to smooth out fluctuations in revenue and expenses.

Secured and Unsecured Revolving Line of Credit: 

Secured lines of credit require collateral, such as real estate, inventory, or equipment, to secure the credit line. Because the lender has the security of collateral, secured lines of credit typically offer lower interest rates and higher credit limits compared to unsecured lines of credit.

Unsecured lines of credit do not require collateral. Instead, the creditworthiness of the borrower determines the credit limit and terms of the line of credit. Interest rates for unsecured lines of credit may be higher, and credit limits lower, compared to secured lines, but they offer the advantage of not requiring collateral.

Home Equity Line of Credit (HELOC): 

A HELOC is a revolving line of credit that is secured by the equity in a borrower’s home. Homeowners can borrow against the equity in their home up to a certain limit, using the home as collateral. HELOCs often have lower interest rates compared to other forms of credit and may offer tax benefits, but they carry the risk of foreclosure if payments are not made.

Revolving Credit Cards: 

Credit cards are a common form of revolving line of credit. They allow cardholders to make purchases up to a certain credit limit, repay the balance, and then borrow again up to the credit limit. Revolving credit cards typically have variable interest rates and may offer rewards or cashback incentives.

Maintenance of Regulatory Capital

According to para 5.9.3 of the Basel III Master Circular, revolving lines of credit can be considered as retail claims for regulatory capital purposes and included in a regulatory retail portfolio if they meet certain conditions. :

However, it is important to understand that a revolving facitliy has a drawn amount (and therefore, on-balance sheet exposure), and the undrawn amount (which is off balance sheet exposure). 

Para 5.15.2 (iv) of the Basel III Circular states that, 

“Where the non-market related off-balance sheet item is an undrawn or partially undrawn fund-based facility, the amount of undrawn commitment to be included in calculating the off-balance sheet non-market related credit exposures is the maximum unused portion of the commitment that could be drawn during the remaining period to maturity. Any drawn portion of a commitment forms a part of bank’s on-balance sheet credit exposure.”

Accordingly, say there is a credit facility for Rs.100 lakh (which is not unconditionally cancellable) where the drawn portion is Rs. 60 lakh, the undrawn portion of Rs. 40 lakh will attract a Credit Conversion Factor of 20 per cent. 

The credit equivalent amount of Rs. 8 lakh (20% of Rs.40 lakh) will be assigned the appropriate risk weight as applicable to the counterparty/rating to arrive at the risk weighted asset for the undrawn portion. The drawn portion (Rs. 60 lakh) which forms a part of the bank’s on-balance sheet credit exposure will attract a risk weight as applicable to the counterparty/rating.

Liquidity Risk 

According to para 131 of the Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring

tools any contractual loan drawdowns from committed facilities and estimated drawdowns from revocable facilities within the 30-day period should be fully reflected as outflows. 

In case of committed credit facilities to retail and small business customers, banks have to assume a 5% drawdown of the undrawn portion whereas in case of non-financial corporates, drawdown has to be assumed for 10% of the undrawn amount.

Can revolving lines of credit be Transferred or Securitised ?

Transfer of Revolving Lines of Credit:

In case of a revolving line of credit, there is typically an undrawn amount. Accordingly, the transfer can only happen for the amount already drawn. However, in terms of the RBI Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 (‘TLE Directions’), the requirement of Minimum Holding Period (‘MHP’) needs to be fulfilled. This MHP requirement is of 3 months for loans having tenure of upto 2 years. Therefore, for loans having very short tenure, it may not be possible to fullfill the same. 

Accordingly, although there is no express prohibition from transferring the line of credit exposure, it may not be practical to do so. 

Securitisation of revolving lines of credit:

As per para 6(d) of the Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 (‘SSA Directions’) securitisation of revolving credit facilities is not permitted. Accordingly, revolving lines of credit cannot be securitised. 

Obtaining Default Loss Guarantee for Revolving Lines of Credit

Default Loss Guarantee(DLG) can only be obtained for digital loans. Since, revolving credit facilities (say, credit cards) may be offered through digital means it is important to discuss if DLG can be obtained for revolving lines of credit. The RBI FAQs (FAQ No.10) on Default Loss Guarantee (‘DLG FAQs) have prohibited REs from entering into DLG arrangements with respect to revolving lines of credit. 

For other non-digital revolving lines of credit provided, the bar on synthetic securitisation continues to apply and therefore, no default loss guarantee can be obtained. 

Conclusion

In a world where financial needs can arise unexpectedly, having access to a revolving line of credit can be invaluable. However, it’s essential for lenders to understand the regulatory requirements and implications associated with these credit facilities to ensure compliance and mitigate risks effectively.

Related Articles – 

Personal revolving lines of credit by NBFCs: nuances and issues

The Credit Card Business for NBFCs

FAQs on Default Loss Guarantee in Digital Lending

Fair Lending: RBI bars several practices

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Lenders asked to mend ways immediately

Team Finserv | finserv@vinodkothari.com

Introduction

If fairness lies in the eyes of the beholder, the RBI’s eye is getting increasingly customer-centric. This fiscal year, the RBI has issued circulars aimed at fostering fairness and transparency in lending practices; these come at the backdrop of circulars last year on penal interest, adjustable rates of interest, release of security interests, strengthening customer service by Credit Information Companies and Credit Institutions, and establishing a framework for compensating customers for delayed updation or rectification of credit information. Recently on April 15, 2024, the RBI introduced a circular on Key Facts Statement (KFS) for Loans & Advances, with the goal of enhancing transparency and reducing information asymmetry regarding financial products offered by various regulated entities. This initiative aims to empower borrowers to make well-informed financial decisions. 

A new Circular, dated 29th April 2024 Fair Practices Code for Lenders – Charging of Interest comes down on some of the practices related to computation of rates of interest by lenders. . This Circular is all about stopping lenders from doing things that aren’t fair when it comes to charging interest. 

Applicability

The Circular applies to a wide range of financial institutions including Banks, Co-operative Banks, NBFCs, and HFCs. It is worth noting that this Circular comes into effect immediately upon its issuance.

Practices observedRegulatory stipulation
Lenders charge interest from the date of execution of the loan, or the date of sanction, even though disbursement has not taken place as yetInterest may be charged only from the date of disbursement
Interest is charged from a particular date, even though it is clear that the cheque was handed over to the borrower several days after the said dateInterest may be charged from the date when the cheque is handed over to the borrower
In some cases, one or more EMIs were received in advance; however, the interest was computed on the loan amount, without considering the advance paymentInterest shall be charged after netting off the advance EMI from the disbursement amount

Our analysis:

  • Loan agreement in place, but disbursement has not happened:
    • If the lender has sanctioned a loan, but the disbursement has not happened, can the lender charge a commitment charge for the period upto disbursement?
      • In our view, the sanction amounts to a committed lending. Committed lending has liquidity implications for the lender, and also eats up regulatory capital. Therefore, it is quite okay for a lender to start charging commitment charge from the date of sanction till the date of disbursement, provided the same is clear in the KFS/terms of the loan.
    • If the disbursement does not happen for a particular period of time, can the lender revoke the sanction?
      • Yes, if the same is clear in the terms of the loan
  • Interest to commence from the date of the disbursement:
    • What is the meaning of the date of disbursement? The funds actually leaving the bank account of the lender, or the cheque handed over?
      • Usually, handing over of a cheque is a common mode of making payments (unless the payments are being made in online mode – see below). Therefore, if there is an evidence of the cheque being handed over, the lender accounts for the disbursement from that date. If the cheque is not encashed, it appears as a reconciliation item. In our view it is okay to relate the date of handing over a cheque to the date of disbursement (assuming the cheque is good for immediate banking; it is not post-dated and subsequently does not bounce).
    • The RBI expects lenders to move to online modes of disbursement. What are the online modes of disbursement that are acceptable?
      • Disbursement through UPI
      • Disbursement to the bank account
      • Electronic Clearing System
      • Lender cannot transfer to a PPI wallet
  • Advance EMIs to be considered while computing interest:
    • Advance EMIs should be captured while computing EMIs. If the EMIs are being collected in “advance” mode, rather than arrears, standard worksheet formulae (PMT) allows for advance EMIs to be considered. There is no further need to net off the advance EMI from the disbursement. For computing amortisation, the interest will be computed on the loan amount, minus the EMI
    • Does the advance EMI also have an interest component?
      • Yes. EMIs is an equated amount, payable through the term of the loan. Each EMI consists of interest and principal. The only difference is that while computing the EMIs, the disbursement was taken as net of the first EMI. That is to say, there is an interest component in the first EMI, but the interest is on the amount remaining after the first EMI. 

Applicability date and scope

  • The circular as above is immediately applicable. Does it apply to existing loans too?
    • Each of the practices referred to above are treated by the regulator as unfair. It is not as if these were fair all this while and become unfair from a particular date. In fact, the Circular also says that the regulator during supervisory inspections has directed lenders to refund the excess interest if collected. Therefore, in our view, each of the above stipulations are applicable on all loans.
  • Is the circular applicable only on “retail loans” as covered by Key Facts Statement (KFS) for Loans & Advances circular, or does it apply to all loans?
    • Coming from basic considerations of fairness, in our view, the Circular is applicable to all loans.

Actionables 

  • REs to check whether the interest is being calculated from the date of actual disbursement rather than from the date of sanction of loan.
  • REs to review their modes of disbursal of loans and to use online account transfers in lieu of cheques. In cases where loan is disbursed through cheques, we recommend REs take an acknowledgement when the cheque is handed over to the borrower
  • REs to check whether they have received any intimation from RBI regarding the refund of any excess interest charged.

Related articles

  1. The Key to Loan Transparency : RBI frames KFS norms for all retail and MSME loans
  2. FAQs on Digital Lending Regulations 
  3. FAQs on Penal Charges in Loan Accounts 
  4. RBI streamlines floating rate reset for EMI-based personal loans

Allow borrowers to make free choice: RBI draft rules for digital loan aggregators

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Manisha Ghosh l manisha.ghosh@vinodkothari.com

In a move aimed at fostering transparency and consumer-centric practices in digital lending, the Reserve Bank of India (RBI) issued draft guidelines for digital loan aggregators on 26th April, 2024  titled ‘Digital Lending – Transparency in Aggregation of Loan Products from Multiple Lenders’. Comments are due on the same.  This regulatory framework underscores the importance of empowering borrowers with complete information during the credit process to make an informed decision.

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IRDAI is a step closer to the vision of Insurance for All by 2047

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– Surabhi Chura | corplaw@vinodkothari.com

The Insurance Regulatory and Development Authority of India (IRDAI) has been committed to nurturing a regulatory environment to accomplish its vision, undertaking significant steps towards ensuring that insurance products and services are accessible to all segments of society. At the 125th meeting held on March 19, 2024, the Authority approved the consolidation of 34 regulations into 6 and 2 new regulations after reviewing the existing regulatory framework in the insurance sector. These regulations span crucial areas such as the protection of policyholders’ interests, responsibilities towards rural and social sectors, the establishment of an electronic insurance marketplace, regulation of insurance products, and the operation of foreign reinsurance branches. Additionally, they cover aspects related to registration, actuarial practices, finance, investment, and corporate governance highlighting IRDAI’s focus on making regulations clearer and more effective.

These regulations result from consultations with a diverse range of stakeholders, including experts in the insurance industry, representatives, and the general public. The new regulations have been notified vide separate gazette notifications on 22nd  March 2024 and onwards.

More: IRDAI is a step closer to the vision of Insurance for All by 2047

Outlined below are the key highlights of the regulations approved:

Erstwhile Regulations New Regulations 
IRDAI (Obligation of Insurers to Rural and Social Sectors) Regulations, 2015IRDAI (Rural, Social Sector and Motor Third Party Obligations) Regulations, 2024
IRDAI (Obligation of Insurer in Respect of Motor Third Party Insurance Business) Regulations, 2015.
IRDAI (Registration of Indian Insurance Companies) Regulations, 2022IRDAI (Registration, Capital Structure, Transfer of Shares and Amalgamation of Insurers) Regulations, 2024
IRDAI (Other Forms of Capital) Regulations, 2022
IRDAI (Manner of Assessment of Compensation to Shareholders or Members on Amalgamation) Regulations, 2021
IRDAI (Issuance of Capital by Indian Insurance Companies transacting other than Life Insurance business) Regulations, 2015
IRDAI (Issuance of Capital by Indian Insurance Companies transacting Life Insurance Business) Regulations, 2015
IRDAI (Scheme of Amalgamation and Transfer of Life Insurance Business) Regulations,2013
IRDA (Scheme of Amalgamation and Transfer of General Insurance Business)Regulations, 2011
IRDAI (Micro Insurance) Regulations, 2015IRDAI (Insurance Products) Regulations, 2024
IRDAI (Minimum Limits for Annuities and other benefits) Regulations, 2015
IRDAI (Acquisition of Surrender and Paid up values) Regulations, 2015
IRDAI (Health Insurance) Regulations, 2016
IRDAI (Unit Linked Insurance Products) Regulations, 2019
IRDAI (Non-Linked Insurance Products) Regulations, 2019
IRDAI (Lloyd’s India) Regulations, 2016IRDAI (Registration and Operations of Foreign Reinsurers Branches & Lloyd’s India) Regulations, 2024
IRDAI (Registration and Operations of Branch Offices of Foreign Reinsurers other than Lloyd’s) Regulations, 2015
IRDAI (Actuarial Report and Abstract for LifeInsurance Business) Regulations, 2016IRDAI (Actuarial, Finance and Investment Functions of Insurers) Regulations, 2024
IRDAI(Distributions of Surplus) Regulations,2002
IRDAI (Assets, Liabilities and Solvency Margin of Life Insurance Business) Regulations, 2016
IRDAI (Assets, Liabilities and Solvency Margin of General Insurance Business) Regulations, 2016
IRDAI (Appointed Actuary) Regulations,2022
IRDAI(Investment) Regulations, 2016
IRDAI (Preparation of Financial Statements and Auditors’ Report of Insurance Companies) Regulations, 2002 
IRDAI (Inspection and Fee for Supply of Copies of Returns) Regulations, 2015
IRDAI (Loans or Temporary Advances to Full Time Employees of the Insurers) Regulations, 2016
IRDAI (Manner of Receipt of Premium) Regulations, 2002IRDAI (Protection of Policyholders’ Interests and Allied Matters of Insurers) Regulations, 2024
IRDAI  (Places of Business) Regulations, 2015
IRDAI (Fee for registering cancellation or change of nomination) Regulations 2015
IRDAI  (Fee for granting written acknowledgment of receipt of Notice of Assignment or Transfer) Regulations, 2015
IRDAI (Issuance of e-Insurance Policies) Regulations, 2016
IRDAI (Outsourcing of Activities by Indian Insurers) Regulations, 2017
IRDAI (Protection of Policyholders’ Interests) Regulations, 2017
IRDAI (Insurance Advertisements and Disclosure) Regulations, 2021

Further, 2 new Regulations have been notified namely – 

While the new Regulations primarily consolidate the existing Regulations as stated above, these also bring in certain new requirements and relaxations for the insurers. In this article, we attempt to discuss the changes brought by the IRDAI (Registration, Capital Structure, Transfer of Shares and Amalgamation of Insurers) Regulations, 2024 (“Registration Regulations, 2024”), and the implications thereof. The amendments in the new regulation are as follows:

  • Insertion of the definition of Competent Authority
  • Withdrawal of application of registration as insurer
  • Non-applicability of lock-in for listed insurers 
  • Issuance of shares at face value and in the same proportion 
  • Temporary relaxation from restrictions on investment by the promoter of the insurer
  • Fit and Proper Criteria
  • Basis of valuation of equity shares of promoter SPV of insurer
  • Relaxation in lock-in requirements
  • Reduction in lock-in requirements for shareholding in the insurer
  • Nomination of Director
  • Prior approval of IRDA for the listing of the insurer

Effective date 

The effective date of the Registration Regulations, 2024 shall be the date of publication in the official gazette, i.e., 20th of March 2024.

New requirements introduced vide the Registration Regulations, 2024

Regulation No.Topic Text of the Regulation Our Remarks 
2 (g) Competent AuthorityCompetent Authority means Chairperson or Whole-Time Member or Committee of the Whole-Time Members or Officer(s) of the Authority, as may be determined by the Chairperson. The concept of “Competent Authority” has been introduced, vide which the recognition of delegated authority has been made explicit in the Regulations. 

In the Registration Regulations, 2024, the reference to the “Authority”, i.e., IRDAI has been substituted with “Competent Authority” in a few matters like approval for the R1 stage, extension for commencement of business, withdrawal of application, etc. where powers have been delegated to the Competent Authority. 
6(7)Withdrawal of application of registration as insurer(a) Any applicant may apply to the Competent Authority for withdrawal of the application for registration at any stage of application, along with reasons.  

(b) The Competent Authority may approve or reject the said request for withdrawal for the reasons to be recorded in writing. 

(c) In case of rejection of request for withdrawal of application, the R1 application or R2 application, as the case may be, may be rejected in accordance with Regulation 6(6)		The Erstwhile Regulations did not contain express provisions with respect to the withdrawal of registration by a proposed insurer, however, the conditions for disqualification of an applicant included a case of withdrawal of the former application by the applicant.The manner in which an application may be withdrawn by an issuer has been specifically provided for under the Registration Regulations 2024. 
12(3)Issuance of shares at face value and in the same proportion Till the time of commencement of insurance business:(i)The equity shares of the Applicant and SPV shall be issued at its face value; 

(ii)The infusion of funds in the Applicant and SPV, by its shareholders, shall be commensurate with the percentage of their equity stake in the Applicant and SPV:

Provided that the issuance of equity shares of insurer or SPV may be permitted to be issued at premium, after the commencement of business.		Till the commencement of business of the insurer, shares are to be issued at face value only and to the existing shareholders in proportion to their existing holding indicating maintenance of a similar shareholding pattern from application till actual commencement of business.This should ideally mean the commencement of business operations as an insurer, and not obtaining the certificate of commencement as under Section 10A of the Companies Act, 2013.
Proviso to Reg 13(1)Temporary relaxation from restrictions on investment by the promoter of an insurerProvided that the Competent Authority may permit a person to be promoter of more than one insurer engaged in the same class of insurance business on a temporary basis if the same is part of the Scheme filed with the Authority under section 35 of the Act. The new proviso facilitates the provision of temporary relaxation by the Competent Authority for a person to act as a promoter in more than one insurer of the same if it is a part of the scheme of amalgamation or transfer filed with the Authority. 
Schedule 1Fit and Proper Criteria(c) Compliance with all applicable laws in India including Prevention of Money Laundering Act, FEMA and taxation law.
Specific reference to the Prevention of Money Laundering Act has been introduced.

Express mention of the term “individual” to signify applicability to individuals along with entities. The Erstwhile Regulations referred to “entity” only. However, even before the insertion, the insurer and the promoters were required to ensure compliance with the criteria. The interpretation before the insertion was the same.  

Amendments to existing requirements under Erstwhile Regulations 

Regulation No.Topic Provisions under Registration Regulations, 2024 vis-a-vis Erstwhile RegulationOur Remarks 
8Relaxation in lock-in requirements Provided that the Competent Authority may relax the lock-in period in following circumstances:
i.(i) To enable the insurer to list its shares on the stock exchange(s) in India.; or
(ii) Under circumstances of distressed financial position or, amalgamation or reorganization pursuant to change in applicable law of the any insurer or the its shareholder(s):

Provided further that the lock-in period shall not be applicable in case of equity shares allotted to employees or directors of the insurer pursuant to any scheme formed for the benefit of the employees or directors of the insurer: 

Provided further that the lock-in period shall not be applicable in case of investor holding not more than one percent of the equity shares of the insurer.
Exemption at the discretion of the Competent Authority:

The new Registration Regulations, 2024 contain enabling powers with the Competent Authority to provide relaxation from lock-in in case of circumstances of distressed financial position or amalgamation/ re-organisation pursuant to legal requirements. 

Absolute exemptions: 
Exemption is given from the applicability of lock-in period for: a. investor holding less than 1% of insurer’s equity; or b.  Shares are held under employee benefit scheme. 
8Reduction in lock-in requirements for shareholding in insurerInvestment after 10 years but before 15 years post grant of R3:

In case of change in shareholding pattern:
Promoter: 2 years from the date of investment
Investor: 1 year from the date of investment

Investment after 15 years post grant of R3
Promoter: 1 year from the date of investment
Investor: Nil		The Erstwhile Regulations required prior approval of IRDAI before listing of shares of the insurer. Under the new Regulations, 2024, only prior intimation is required subject to satisfaction of the following conditions:
I. Listing of equity shares is in the interests of policyholders;
II. The insurer shall comply with the regulatory framework. 
III. The listing of equity shares shall not be used as a medium to raise capital or transfer shares which would be in contravention of the applicable regulatory provisions.
IV. The insurer shall seek approval for the transfer of shares. 
V. The insurers specified under section 10A of the General Insurance Business (Nationalization) Act, 1972 shall ensure compliance with the provisions of section 10B of the said Act.
VI. Such other conditions as may be specified.
10Basis of valuation of equity shares of promoter SPV of insurerThe equity shares to be issued by the SPV shall be valued at a price determined on the basis of valuation certificate issued by two one SEBI Registered Category-I Merchant Banker.Valuation of shares of the SPV can be determined based on a valuation certificate issued by one SEBI Registered Category-I Merchant Banker instead of two as required under the Erstwhile Regulations
16Nomination of DirectorProvided that the investor may nominate a director on the Board of the insurer if its investment exceeds 10 percent of the paid up capital of the respective insurer.

New Regulations
1.The investors may nominate not more than one director on the Board of the insurer if its investment exceeds 10 percent of the paid-up capital of the respective insurer.
2. If the investment in the insurer does not exceed ten percent of the paid-up capital of the respective insurer. The investor shall not nominate any director on the Board
3. No shareholder shall nominate any director on the board of any insurer if it has already nominated a director on the board of any other insurer engaged in the same class of insurance business.		The 2024 Regulations provide stringent requirements with respect to the appointment of a nominee director, allowing only 1 nominee director to be appointed. 
Further, the restriction of appointing only one nominee director is across insurers. 

Will this mean that an investor and the insurer can not mutually agree to have representation on the insurer’s Board or, seek express permission from the Authority for such representation?


29Prior approval of IRDA for listing of insurer No Indian insurance company transacting the General insurance or Health insurance or Reinsurance business shall approach the SEBI for public issue of shares and for any subsequent issue, by whatsoever name called, under the ICDR Regulations without the specific previous approval of the Authority in writing under these Regulations.

New Regulations:
An insurer may approach the appropriate financial sector regulator for listing of its equity shares, by way ofdivestment of equity shares by existing shareholders or fresh issue of equity shares by the insurer or both, on thestock exchange(s) recognized under Securities Contracts (Regulation) Act, 1956 upon fulfilment of following conditions:
(1) The Board of the insurer resolves that such listing of equity shares is in the interests of policyholders.
(2) The Board of the insurer resolves that the insurer shall be able to comply with the regulatory stipulations of the said financial sector regulator(s).
(3) The listing of equity shares on stock exchange(s) shall not be used as medium to raise capital or transfershares which would otherwise be in contravention to the applicable regulatory provisions.
(4) All the regulatory provisions stipulated by the Authority shall be complied with scrupulously.(5) The insurer shall have obtained prior approval for transfer of shares for offer for sale and/or fresh issuanceof shares, as may be required vide section 6A of the Act read with Regulation 21 of these regulations:Provided that the submission of the details of transferee shall not be mandatory.
(6) The insurers specified under section 10A of the General Insurance Business (Nationalization) Act, 1972shall ensure compliance with the provisions of section 10B of the said Act.
(7) The insurer shall file an intimation with the Authority at least 15 days before it approaches the appropriate financial sector regulator for listing of its equity shares. The insurer shall also keep the Authority informed regarding the subsequent developments in the said matter.
(8) Any documents filed by the insurer under this chapter or any communications between insurer and the Authority with regard to proposed listing of equity shares shall not in any manner be deemed to be orserve as a validation by the Authority of the facts, representations, assertions or anything written in theoffer documents. This fact shall be disclosed in bold letters in the offer document.
(9) Such other conditions as may be specified.		The Erstwhile Regulations required prior approval of IRDAI before listing of shares of the insurer. Under the new Regulations, 2024, only prior intimation is required subject to satisfaction of the following conditions:
I. Listing of equity shares is in the interests of policyholders;
II. The insurer shall comply with the regulatory framework. 
III. The listing of equity shares shall not be used as a medium to raise capital or transfer shares which would be in contravention to the applicable regulatory provisions.
IV. The insurer shall seek approval for the transfer of shares. 
V. The insurers specified under section 10A of the General Insurance Business (Nationalization) Act, 1972 shall ensure compliance with the provisions of section 10B of the said Act.
VI. Such other conditions as may be specified.

Conclusion

One of the key objectives of the IRDAI includes the promotion of competition to enhance customer satisfaction through increased consumer choice and fair premiums while ensuring the financial security of the Insurance market. The Registration Regulations, 2024 largely revolve around encouraging and providing flexibility to the insurers in notable areas like registration, lock-in relaxations, and listing of the insurers.  By consolidating regulations, the process of starting and operating an insurance company is expected to become more efficient, having a single regulation may improve clarity and transparency for insurers regarding these processes, and a simplified procedure would encourage investment and participation in the Insurance Sector. The consolidation of various regulations is a step to pave the way for a more inclusive insurance sector, attracting new insurers, and ultimately achieving IRDAI’s vision of ‘Insurance for All’ by 2047.

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-Vinod Kothari and Anita Baid | finserv@vinodkothari.com

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