RBI prescribes tighter norms for core investment companies' entry into insurance business
02 April 2013
The Reserve Bank of India (RBI) has prescribed tighter norms for the entry of core investment companies (CICs) in the insurance business while barring them from the business of insurance broking.
RBI has defined a systemically important core investment company (CIC-ND-SI) as a non-banking financial company (NBFC) with an asset size of Rs100 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, however, will permit CICs registered with itself to set up a joint venture company for undertaking insurance business with risk participation if they meet the prescribed eligibility criteria, and subject to safeguards.
The maximum equity contribution such a CIC can hold in the joint venture company will be as per IRDA guidelines.
To be eligible for equity participation in an insurance venture, a joint venture participant should have net owned funds of not less than Rs500 crore, as per the latest available audited balance sheet.
The CIC should have reported net profit continuously for three consecutive years and the level of net non-performing assets should be not more than 1 per cent of the total advances.
The performance track record of the subsidiaries of the CIC, if any, should also be satisfactory.
The CIC should comply with all applicable regulations, including CIC directions 2011. Thus CICs-ND-SI are required to maintain adjusted net worth of not less than 30 per cent of aggregate risk weighted assets on balance sheet and risk adjusted value of off-balance sheet items.
No CIC would be allowed to conduct such business departmentally. Further, an NBFC (in its group / outside the group) would normally not be allowed to join an insurance company on 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 per cent of the equity of the insurance company either on a solo basis or in 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 case where a foreign partner contributes 26 per cent of the equity with the approval of Insurance Regulatory and Development Authority/Foreign Investment Promotion Board, more than one CIC may be allowed to participate in the equity of the insurance joint venture. As such participants will also assume insurance risk, only those CICs, which satisfy the criteria, would be eligible.
CICs cannot enter into insurance business as agents. CICs that wish to participate in insurance business as investors or on risk participation basis will be required to obtain prior approval of the Reserve Bank of India.
The RBI will give permission on a case-to-case basis keeping in view all relevant factors. It should be ensured that risks involved in insurance business do not get transferred to the CIC.
Holding of equity by a promoter CIC in an insurance company or investment in insurance business will be subject to compliance with rules and regulations laid down by the IRDA and the central government, including compliance with section 6AA of the amended Insurance Act for divestment of equity in excess of 26 per cent of the paid-up capital within a prescribed period of time.
CICs exempted from registration with RBI in terms of the Core Investment Companies (Reserve Bank) Directions, 2011 do not require prior approval provided they fulfill all the necessary conditions of exemption.