Four months after the Foreign Investment Promotion Board and the Competition Commission of India had cleared European insurance major AXA SA’s proposal to hike its stake in its life and non-life insurance ventures with Bharti Enterprises from 26% to 49%, the insurance regulator Irda hasn’t approved the same as it feels that “management control” of the ventures are effectively in foreign hands.
Sources from the finance ministry and Irda told FE that the proposal is stuck with the regulator because the “veto rights” accorded to AXA, under an amended shareholder agreement, amounted to management control being with the foreign firm. When Parliament passed the Insurance Laws (amendment) Bill raising the foreign investment limit in insurance companies in March, it also stressed that the control and majority ownership of these companies must remain with Indian promoters.
Sources said given an explicit provision to that effect in the amended law, Irda has asked Bharti-AXA to restructure the agreement in such a way that not just the majority ownership, but the management control also remain in the hands of resident Indian entities. It cited the sensitivities involved in insurers mobilising and handling huge amounts of public money and chances of misuse.
AXA was the first foreign partner firm to seek to raise stakes in the JVs with local partners after the foreign investment ceiling was raised. A Bharti spokesperson declined to comment for this story.
According to the sources, Irda has said the Bharti-AXA agreement need to be in compliance with the provision of ‘control’ as defined in the Companies Act, Foreign Direct Investment Policy, Indian Insurance Companies (Foreign Investment) Rules, 2015, and the amended Insurance Act. In these policies/Act/rules, control is broadly defined as “the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements”.
Meanwhile, Irda is working on issuing new guidelines for such JVs with foreign partners regarding ‘management control’ under the ‘corporate governance’ structure. The guidelines will be ‘hybrid’ in nature, sources said, as they will have inferences encompassing all possible scenarios — including financial and non-financial ones — of ‘management control’ covertly being in foreign hands.
However, some clearances to cases such as Bharti-AXA could be given even before the final guidelines are out, sources said, provided they are compliant with the extant definitions of ‘control’, subject to the condition that they should comply with the new guidelines once these are notified within a given timeframe.
Analysts reckon the need to expedite the clearances as many proposals from overseas partners to hike stakes in their insurance joint ventures are on the anvil and the sector’s huge capital needs for expansion. A foreign investment proposal up to 26% in the insurance sector is permitted via the automatic route and proposals that take foreign investments above 26% and up to the ceiling of 49% need FIPB approval.
The Irda guidelines are meant to eliminate wrong interpretations of the ‘management control’ provisions and giving clarity to the term so that a standard joint venture agreement compliant with the amended insurance law between foreign companies and local partners is in place.
The guidelines will make inferences on situations such as the foreign partner on paper having a minority equity holding, but covertly holding control thanks to loans infused in the domestic partner’s insurance company or ventures in other sectors. Another possible inference is on individual(s) having a significant holding in the domestic entity forging separate partnerships with foreign entities to indirectly hand over control to foreigners. There could also be cases where, even without making any actual investment, certain individuals can hold control over management and day-to-day affairs of the venture.
1.Irda feels ‘control’ of the two ventures are effectively in foreign hands
2.AXA’s proposal to hike stakes in JVs has been cleared by CCI & FIPB
3. Once the shareholder agreement is reworked, Irda will give the nod