The Reserve Bank of India (RBI) has barred core investment companies from the insurance broking business and has laid tighter conditions for entering the business.
The guidelines say that a systemically important core investment company (CIC-ND-SI) is a non-banking financial company (NBFC) with an asset size of Rs 100 crores and above, with not less than 90% of net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt and loans in group companies.
RBI has said that 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.
CIC 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 RBI which will give permission on a case-to case basis, keeping in view all relevant factors.
At present, NBFCs venturing into insurance is governed by guidelines in this regard. RBI said that 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, RBI has clarified that CICs cannot undertake an insurance agency business.
This move comes at a time, when some NBFCs have entered into agreements to purchase stakes in insurance companies. In March, Pantaloon Retail decided to sell 22.5% of its stake in Future Generali India Life Insurance to Industrial Investment Trust Ltd (IITL). IITL is an investment company registered as an NBFC (non-deposit taking) with RBI and is listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). The IITL group has subsidiary companies in real estate, infrastructure, stock broking and insurance broking.
RBI said that 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 fund of Rs 500 crores. Further, the level of net non-performing assets should 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 concern 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 should be not less than 30% of aggregate-risk, weighted assets on the balance sheets and the risk-adjusted value of off-balance sheet items.
Further, RBI said that 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, CICs may be permitted to invest up to 100% 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 insure 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 foreign partner contributes 26% 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.
