The Insurance Regulatory and Development Authority of India (“IRDAI”) had notified the IRDAI (Other Forms of Capital) Regulations, 2015 (“2015 OFC Regulations”) to provide for a regulatory framework for the issuance of preference shares or subordinated debt (“OFC Instruments”) by insurance companies and associated disclosure and reporting norms.

On 2 August 2022, the IRDAI notified an exposure draft of the IRDAI (Other Forms of Capital), 2022 that proposed to replace the existing OFC Regulations. After the public consultation period, IRDAI notified the IRDAI (Other Forms of Capital) Regulations, 2022 (“Amended OFC Regulations”) on 5 December 2022, which will be in force for a period of 3 years (unless replaced or amended earlier).

In this note, we have highlighted the key changes introduced in the OFC Regulations.

1. Dispensation of requirement for IRDAI approval

• Issuance of OFC Instruments
  Under the 2015 OFC Regulations, insurers were required to obtain prior approval of the IRDAI for the issuance of OFC Instruments in the format prescribed in Form 1 of the 2015 OFC Regulations. The Amended OFC Regulations omit the requirement for prior approval of the IRDAI for the issuance of OFC Instruments.
• Payment of dividend or interest in relation to OFC Instruments
  The 2015 OFC Regulations prohibited the payment of dividend or interest in relation to OFC Instruments if the solvency of the insurer was not as per the regulatory stipulation. It also required the prior approval of the IRDAI if the impact of paying dividend or interest may have resulted in or increased the insurer’s net loss. The Amended OFC Regulations require insurers to obtain prior approval of the IRDAI for payment of dividend or interest in relation to OFC Instruments for any financial year only if: (i) the solvency of the insurer is below the minimum control level of solvency; or (ii) the impact of such accrual or payment would result in the control level of solvency falling below or remaining below the regulation requirements specified by the IRDAI; or (iii) the impact of accrual or payment of interest results in net loss or increases the net loss.
• Call back of OFC Instruments
  The 2015 OFC Regulations required an insurer to obtain approval of the IRDAI prior to the exercise of a call option on OFC Instruments. The Amended OFC Regulations omit the requirement of prior approval of the IRDAI in relation to exercise of call options if the solvency position of the insurer is at least 20% above the control level of solvency. Instead, the Amended OFC Regulations require the insurer to inform the IRDAI of the exercise of a call option within 15 days from the date of the communication of exercise of the call option. However, if the solvency position drops below this threshold, prior approval of the IRDAI will be required prior to exercise a call option. While considering the proposal to exercise a call option, the IRDAI shall, amongst other things, take into consideration the insurer’s solvency position and future business plans, both at the time of exercise of the call option and after exercise of the call option.
• Replacement of OFC Instruments with an equal or better-quality instrument
  Under the 2015 OFC Regulations, the replacement of OFC Instruments with an equal or better-quality instrument required prior approval of the IRDAI. Under the Amended OFC Regulations, such an approval is not required unless the call back of the OFC Instrument requires the approval of the IRDAI, as specified  above.

2. Limit on quantum of OFC Instruments

• Under the 2015 OFC Regulations, the total quantum of OFC Instruments issued by an insurer could not exceed 25% of the total paid up equity share capital and securities premium of the insurer at any point of time. Further, the total quantum of OFC Instruments could not, at any point, exceed 50% of the net worth of the insurer.
• Under the OFC Regulations, the total quantum of OFC Instruments issued by an insurer shall be the lower of the following, at any point of time:
  (i) 50% of the total paid up equity share capital and securities premium of the insurer; or
  (ii) 50% of the net worth of the insurer.

Author: Deepa Christopher – Partner