Insurance : Exposure Draft on Schemes of Arrangement and Transfers of Non-Life Insurance Business
CIRCULAR NO. 305.2/1/F&AILAB2008/277/2011-12, DATED 9-2-2011
Section 35 of the Insurance Act, 1938 lays down the framework for amalgamation and transfer of life insurance companies. However, a similar provision is not available in case of non-life insurance companies. This anomaly is proposed to be rectified in the Insurance Amendment Bill, 2008. Against the background of the fact that there exists a statutory/regulatory gap with respect to the non-life insurance companies pending the amendment, the Authority is presently in the process of laying down the framework for amalgamation of non-life insurance companies.
The enclosed Exposure Draft lays down the framework for amalgamation of non-life insurance companies.
Comments are invited on the Exposure draft at the email id email@example.com latest by 22nd February 2011. Based on the comments received the Authority would finalize the framework for amalgamation of non-life insurance companies.
Schemes of Arrangement and Transfers of Non-Life Insurance Business
Whereas the Insurance Regulatory and Development Authority has been established under the Insurance Regulatory and Development Authority Act, 1999 (“the Act”), with a view to inter alia protect the interests of holders of insurance policies, and to regulate, promote and ensure orderly growth of the insurance industry, in exercise of its powers conferred under Section 14 of the Act read with Sections 6A and 34 of the Insurance Act, 1938, the Authority is hereby making this general order containing directions to be followed in connection with any schemes of arrangement and other transfers of non-life insurance business in India.
(1) No scheme of arrangement or agreement involving a direct or indirect transfer of non-life insurance business of any insurer shall be implemented except in compliance with these directions, and with the approval of the Authority.
(2) Any such scheme of arrangement or agreement shall be submitted to the Authority in draft form, seeking approval, and shall set out the terms on which the transfer or vesting of the non-life insurance business is proposed to be effected. The details required to form part of the application for approval are enlisted at Annexure A.
(3) Before an application is made to the Authority to approve any such scheme or transfer, notice of the intention to make the application together with a statement of the nature of the arrangement or transfer, as the case may be, and of the reason therefor shall be sent at least two months before the application is made, to the Authority and certified copies, four in number, of each of the following documents shall be furnished to the Authority:
(a) a draft of the agreement or deed under which it is proposed to effect the arrangement or transfer;
(b) balance-sheets in respect of the insurance business of each of the insurers concerned in such arrangement or transfer, prepared in the form as indicated in the IRDA (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2002;
(c) Financial Condition Report; IBNR Report; and Solvency Statement prepared in conformity with the requirements of relevant regulations and Circulars issued by the Authority, including Assets, Liabilities and Solvency Margin Regulations, Circular No. IRDA/ACTL/CIR/MISC/081 /05/2010 dated 13th May, 2010; and Circular on furnishing of IBNR Reports.
(d) a report on the proposed arrangement or transfer, prepared by an independent actuary who has never been professionally connected with any of the parties concerned in the arrangement or transfer at any time in the five years preceding the date on which he signs his report;
(e) any other reports on which the scheme of arrangement or transfer was founded.
(4) The balance sheets, reports and abstracts referred to in clauses (b), (c), (d) and (e) shall be prepared as at the date at which the arrangement or transfer would take effect, if approved by the Authority, on a proforma basis. Such appointed date for the transfer shall not be more than twelve months before the date on which the application to the Authority is made under this Order, or such extended date as may be granted by the Authority.
(5) Upon the application being made to the Authority, and on grant of ‘in-principle’ approval, copies of the draft scheme of arrangement or agreement of transfer shall be kept open for inspection by policyholders at the principal and branch offices and chief agencies of the insurers concerned.
II. Sanction by the Authority:
Upon an application for approval being received, the Authority may direct that notice of the application in such form as it may direct be sent, to every person resident in India who is the holder of a non-life policy of any insurer concerned in the proposed transaction, and may also cause a statement of the nature and terms of the arrangement or transfer, as the case may be, to be published in such manner and for such period as it may direct.
Provided that if the arrangement involves a reduction of the amount of the insurance and other contracts of the transferor insurer or of any or all of the insurers concerned in the arrangement, the Authority may approve the arrangement reducing the amount of such contracts upon such terms and subject to such conditions as it may think proper, and the reduction of contracts as approved by the Authority shall be valid and binding on all the parties concerned.
III. Approval of the Scheme of Arrangement by the High Court:
Section 616 of the Companies Act, 1956 provides that in addition to the provisions of the Companies Act, 1956, the provisions of insurance laws too shall have to be complied with1. In other words, the application of company law is without derogation of the applicability of insurance laws, as applicable to insurance companies. Notwithstanding the aforesaid, the transacting parties shall be required to comply with all other applicable law including, without limitation, taxation law.
Consequently, for transfers of non-life insurance business undertakings under schemes of arrangement, subject to the in-principle approval of the Authority, the insurers shall approach the relevant court / tribunal for confirmation of the scheme of arrangement in terms of sections 391 to 394 of the Companies Act, 1956, which schemes shall, in turn, be subject to the final approval of the Authority.
In the interests of clarity it is emphasized that the said approval by the relevant court / tribunal under Sections 391 to 394 of the Companies Act, 1956 would be for purposes of compliance with the procedure therefor, as specified under the Companies Act, 1956, without impeding, prejudicing or diminishing the powers of the Authority in any manner to review and approve the scheme of arrangement involving any non-life insurance company from the standpoint of interests of policyholders and the interests of orderly growth of the insurance industry.
The Authority shall exercise its powers to direct that the formulation of the scheme be in the best interests of orderly growth of the insurance sector and to protect the interests of the policyholders.
IV. Process of obtaining approvals:
Since the process of the scheme of arrangement may need to be broken down into multiple transactions extended over a period of time, and would in normal course require various approvals, at the initial stage of filing of the proposal document and on being satisfied with the overall scheme of arrangement, the Authority, would only grant ‘In-Principle’ approval subject to such conditions as may be considered appropriate. The final approval to the scheme of arrangement, in the normal course, would be granted only after all other regulatory and Court approvals/sanctions have been obtained and finalized, and confirmation that the scheme of arrangement for which approval has been obtained by the insurers is in conformity with the draft scheme of arrangement for which the Authority granted in-principle approval. Thus, the approval process would broadly entail three phases as under:
i. In-principle approval by the Authority: The Authority would review the draft scheme of arrangement. Subject to (i) the Authority being convinced that it is in the interests of the orderly growth of the insurance sector, and (ii) on compliance with any requirements as the Authority may deem fit in the context of its regulatory mandate, and on confirmation of compliance with the same, the Authority would grant in-principle approval to the proposal subject to such conditions as it may consider appropriate.
Prior to the grant of the in-principle/final approval to the proposed arrangement, the Authority reserves the right to appoint an independent actuarial consultant to carry out actuarial valuation of the insurance businesses (encompassing the assets, liabilities and solvency position) of the proposed transacting parties.
While granting the in-principle approval and during the period prior to the transacting parties receiving the Court approval for the scheme of arrangement, the Authority may impose requirements on the transacting parties as it may consider necessary and appropriate (a) to ensure protection of the interests of the policyholders and (b) to ring fence the assets of the proposed transacting entities. These requirements may include any requirements for filing of information reports at such periodicities as the Authority may deem fit.
Further, during the interim period, the parties to the arrangement shall ensure that the insurance operations are carried out in compliance with the requirements of the Insurance Act, 1938, the regulations issued thereunder and the directions of the Authority.
ii. Approvals from various regulatory bodies/authorities: Upon receipt of the ‘in-principle’ approval of the Authority, the parties involved in the scheme of arrangement would initiate steps to seek approvals as under:
(a) file the scheme of arrangement (along with the ‘in-principle’ approval of the Authority) with the relevant High Courts; and
(b) file applications with the Foreign investment Promotion Board (FIPB) and the Reserve Bank of India(RBI) seeking the requisite approvals, if any.
(c) In cases where a foreign joint venture partner is also associated with the transaction, the requisite approvals from the relevant jurisdiction regulator shall be filed with the Authority.
iii. Final approvals from the Authority: On completion of the various processes indicated at (ii) above, the transacting parties would approach the Authority for its final approval of the scheme of arrangement. The Authority would review the court-sanctioned scheme to consider if it conforms to the final draft scheme for which the Authority had granted its in-principle approval.
On grant of final approval of the scheme, the Authority shall also revoke the license of the amalgamated entity to underwrite insurance business.
V. Various Steps in the process
The proposal shall cover the sequencing of various steps that the parties to the transaction propose to undertake at different stages of the arrangement. The proposal shall also include the details of flow of consideration and the manner in which the parties will ensure that on completion of the transaction, the solvency level of the merged entity is above the statutorily required minimum level and the inter-linkages between capital contributions and the regulatory approvals process.
Based on the various approvals required, the arrangement process can also be segregated into three broad stages. The various steps required to be completed during the three stage process are outlined below:
STAGE I: Various steps to be initiated to seek in-principle approval from the Authority:
The parties intending to transact in the transfer of the non life insurance companies are required to approach the Authority with their draft proposal. The Authority would scrutinize the proposal with the objective of ensuring the orderly growth of the insurance sector and protection of the interests of policyholders. The Authority may also issue such directions as it may deem necessary as part of the scheme of arrangement filed by the interested parties.
1. Submission of proposal document to the Authority
2. Submission of the draft scheme of arrangement to the Authority
3. Address the various queries raised by the Authority on the scheme of arrangement.
4. Finalize the draft scheme of arrangement based on the suggestions/directions issued by the Authority.
5. Based on the draft scheme of arrangement, finalize the various definitive documents between the interested parties.
6. Initiate steps to seek approvals of such statutory/ regulatory bodies as may be necessary including the FIPB and the RBI.
7. Grant of ‘in-principle’ approval by the Authority.
8. Public announcement of the proposed arrangement.
STAGE II: Various steps to be initiated post in-principle approval from the Authority:
Post receipt of the in-principle approval from the Authority, the various steps required under the Companies (Court) Rules, 1959 for confirmation of schemes of arrangement under Section 391 to Section 394 of the Companies Act, 1956, would have to be complied with.
STAGE III: Final approval of the Authority:
Post receipt of various approvals of any other applicable regulatory authority including FIPB and / or the RBI, the final steps would be taken to ensure that the arrangement process is completed. These include the following:
1. Apply to the Authority for final approval of transaction. The Scheme shall be effective from the date of grant of final approval by the Authority. Further, the Authority may, if it so requires, specifiy different dates for different provisions of the scheme.
2. On receipt of the approval from the Authority, the parties will proceed to complete the agreed capital infusions and the various transfers/subscription.
3. Stamping of the order of the Courts/Tribunal.
4. Filing of the Court/Tribunal order with the Registrar of Companies (ROC).
5. Publication of Notice in the newspapers about completion of the process (atleast one national Daily and one vernacular, copies of which shall be filed with the Authority).
Simultaneous with the filing of the Court Order with the Registrar of Companies, the transacting parties would also complete the underlying restructuring of the share capital. . Upon completion of the process, all associated parties, including various authorities /agencies would be informed of the completion of the process (including change in land documents /mutation entries).
The resultant entity shall ensure that it is compliant with all statutory and regulatory requirements as laid down under the Insurance Act, 1938, the regulations framed thereunder and any directions as may be issued by the Authority.
VI. Requisite Documentation/Agreements to be filed with the Authority:
The scheme of arrangement shall include the executive summary of the various agreements proposed to be entered into between the transacting parties. These documents would broadly include the following:
a) Share Purchase/Subscription Agreement with respect to the transfer/acquisition of shares by the transacting parties;
b) Shareholders’ Agreement with respect to the management and governance arrangements for the resultant entity inter-se its shareholders;
c) Agreement with respect to the simultaneous closing of all transactions and inter-conditionality of various transfers; and
d) Revised memorandum and articles of association of the resultant entity.
e) Any other document which may form part of the scheme of arrangement.
In addition to the various transaction documents, various supporting documents as required to be filed as part of the scheme of arrangement as laid down at Annexure A of this Order shall also be appended to the draft scheme of arrangement.
VII. Payment of fees for processing of the application:
(a) The fees for the processing of the application shall be remitted by a demand draft issued by a scheduled bank in favour of the Insurance Regulatory and Development Authority payable at Hyderabad. The fees shall be one-tenth of one per cent of the total gross premium written direct in India by the transacting entities during the financial year preceding the financial year in which the application is filed with the Authority. The proportionate fees shall, however, be subject to a minimum of rupees fifty lakhs, but not higher than rupees five crores.
VIII. Transfer of non-life insurance business not being through schemes of arrangement
The provisions of these directions shall apply mutatis mutandis to transactions involving transfer of non-life business undertakings not entailing transfers by way of schemes of arrangement.
1 Section 616 of the Companies Act, 1956, inter-alia provides that ‘The provisions of this Act shall apply-
(a) to insurance companies, except in so far as the said provisions are inconsistent with the provisions of the Insurance Act, 1938’.
Scheme of Arrangement
The insurers proposing to approach the Authority for approval under the terms of this Oder shall prepare a comprehensive scheme of arrangement providing details of the various aspects of the proposed transaction including the transfer of business, properties, assets and liabilities of the resultant entity; the duties, authorities and privileges, the liabilities and obligations of resultant entity subsequent to the merger; the right and interests of policyholders, shareholders and creditors; treatment of products; the board composition and management of the resultant entity subsequent to the merger; alteration to memorandum and articles of association; the issue of shares to the shareholders of the proposed resultant entity; the protection of legal rights of employees of the resultant entity including continuance of their service; the transfer of pending litigation against the resultant entity including conditions in relation to these matters; and any other aspect which the Authority may consider necessary.
The scheme of arrangement required to be filed with the proposal will, inter alia, incorporate the following aspects:
I. Composite Approval of the Authority:
The proposed scheme of arrangement may include more than one transaction which would need to be carried through to complete the process of arrangement. While filing the application for the approval of the Authority, the application shall cover all aspects of the proposal and the composite approval of the Authority shall be sought. The proposed scheme of arrangement shall include the following:
(a) Explanation of the intent of the parties to undertake the transactions which would result in change of structure of the parties to the transaction; and
(b) the structure of the entities both pre and post the transaction.
The approval of the Authority shall be sought under the provisions of the Insurance Act, 1938, the IRDA Act, 1999 and the regulations framed there under. Since the scheme of arrangement of non-life insurance companies would be approved by the High Court under the provisions for the Companies Act, 1938, at the initial stage in-principle approval will be granted by the Authority for the entire transaction. The final approval of the Authority for the entire transaction would be granted only after it is satisfied (i) with the final scheme of arrangement sanctioned by the High Courts and (ii) that all requirements of the Insurance Act, 1938 and other applicable regulations, and the guidelines contained in this order have been met.
II. Rationale for the Arrangement:
The proposal shall contain in detail the commercial and other rationale for the proposed merger. The proposal shall also cover protection of the interest of the various stakeholders (including policyholders, creditors and/or shareholders of the merging entities.
In addition, the details of any optional agreements between parties, forming part of the scheme of arrangement shall also be enclosed with the application.
III. Board Composition and Senior Management:
The composition of the board of directors (Board) of the proposed resultant entity shall be furnished. The details of the role and functions of the senior management shall also be provided. The proposed structure of the Board and the senior management shall be compliant with the corporate governance guidelines issued by the Authority.
IV. Key Regulatory Approvals (other than the Authority) and Compliance with Applicable Laws:
The process would require various regulatory approvals, other than those from the Authority. The details of all such approvals shall be outlined and listed in the proposal document. The document shall also contain a statement in respect of compliance by the transacting parties with all applicable laws. The details of such compliances and the certified copies of the applications/draft of such application made/to be made to various regulatory bodies shall form part of and be annexed to the application document (including compliance with the Competition Act, 2002; and/or regulatory approvals from the FIPB and the RBI, wherever applicable).
The draft copies of the applications to be filed with the RBI and the FIPB will be annexed to the Scheme of arrangement.
V. Summary of Scheme of Arrangement:
The details of the scheme of arrangement (to be prepared in consultation with the Authority) to be filed with the relevant High Court(s) under Section 391 read with Section 394 of the Companies Act, 1956 shall be furnished to the Authority. A copy of the draft scheme of arrangement (in the form intended to be filed with the High Court(s) shall be annexed to the scheme of arrangement.
The scheme of arrangement would cover, at the minimum, the following aspects as applicable, and would be as approved by the Authority:
(a) the transfer of business, properties, assets and liabilities of the transferor entity to the transferee entity;
(b) the treatment and transfer of the existing policies of transferor entity (while ensuring that the policyholders’ interests are not adversely affected);
(c) alteration to the memorandum and articles of association of transferee entity to the extent required;
(d) the transfer of pending claims and litigation of transferor entity to the transferee entity;
(e) the manner in which the transferor entity’s business would be carried on between the date of the filing of the scheme of arrangement with the relevant High Courts and the effectiveness of the scheme;
(f) the protection of the legal rights of the employees of the transferor entity including continuance of service, wherever applicable;
(g) the cancellation of the shares of the transferor entity;
(h) the allotment of shares to the shareholders of the transferor entity and the method of deriving the basis and valuation for such allotment; and
(i) the dissolution of the transferor entity without winding-up.
The scheme of arrangement shall also incorporate such other aspects as the Authority may consider necessary to form part of the proposal to be filed for in-principle approval.
VI. Protection of Policyholders’ Interests:
The scheme of arrangement shall set out the manner in which the interests of the policyholders of the transacting parties will be protected and the migration of the policyholders of transferor entity to the transferee entity. The transacting parties shall ensure that the policyholders of the transferor entity are migrated in a manner which ensures that their existing policies are continued to be serviced by the transferee entity on terms and conditions no less favourable than those existing prior to the merger. The policyholders of the transferor entity shall also be given the exit option.
The proposal document shall also lay down the mechanism for handling the grievances of the policyholders of the transferor entities post completion of the arrangement. In addition, the parties to the arrangement proposal shall also confirm that during the interim period, the mechanism for handling consumer grievances shall continue to be operational as per the stipulations laid down by the Authority and the internal mechanisms of the parties shall be in place to ensure that the interests of the policyholders are not adversely impacted.
VII. Rationalization and Streamlining of Products:
The scheme of arrangement shall lay down the manner in which the transacting parties propose to rationalize and streamline the existing range of the products offered by them. This process of rationalization shall be in accordance with the Authority’s regulatory framework including the ‘File and Use’ Guidelines.
VIII. Protection of Legal Rights of Employees:
The scheme of arrangement shall deal with the issues relating to protection of the rights of the employees of the transferor entity. The transacting parties will also ensure compliance with the employment laws and regulations applicable in the country.
IX. Impact on Distribution/Intermediaries:
The scheme of arrangement shall set out the manner in which the transacting parties will deal with the various issues (including rationalization and training/ upgradation of skills, etc.) relating to distribution channels/intermediaries (including agents, corporate agents and brokers; and third party administrators) and ensure compliance with the regulatory framework.
X. Reinsurance Strategies and Protection and Maintenance of Reinsurance Assets:
The scheme of arrangement shall set out the manner in which the transacting entities propose to deal with the re¬insurance strategies post arrangement. The transferee entity should be compliant with the regulatory requirements laid down by the Authority to ensure that an optimal reinsurance program is in place for the transferee entity.
XI. Key Contracts:
The scheme of arrangement shall list out the significant contracts, the implications of the arrangement on such contracts and the steps that will be taken to keep the contracts in force post arrangement. The proposal would specifically deal with the manner of dealing with contracts in place with respect to the transacting entities, which may be terminated and the monetary implications, if any, due to early termination of said contracts.
XII. Taxation, Accounting and Valuation:
The scheme of arrangement shall set out the manner in which the transacting entities propose to deal with the following aspects:
(a) the tax related implications of the proposed arrangement;
(b) the accounting treatment of the arrangement (including the valuation of assets and liabilities of the parties to the scheme of arrangement).
The transacting entities are also required to indicate the names of the independent actuarial consultants who would carry out / have carried out the valuation of assets and liabilities of the transacting entities.
XIII. Operations of transacting entities pending the Arrangement:
The scheme of arrangement shall set out the manner in which the transacting parties shall conduct their day-to-day operations in compliance with the regulatory framework as laid down by the Authority, including maintenance of solvency margin and protection of the policyholders’ interest, pending the effectiveness of the scheme of arrangement.
The parties to the transaction shall also ensure compliance with all requirements on filing of special returns during such period as may be specified by the Authority.
XIV. Public Announcements:
The scheme of arrangement shall set out the manner in which the transacting parties shall deal with both external and internal communications and public announcements, including those which may be stipulated by the Authority, in relation to the proposed transaction.
XV. Rationalization of Branch Network:
The scheme of arrangement shall set out the modalities for the review of the branch network of the transferee entity, following completion of the scheme of arrangement. Such rationalization shall, however, be with the due prior approval of the Authority.
XVI. Handling issues relating to Information Technology:
The scheme of arrangement shall set out the plan of the transacting parties to address issues relating to information technology and to ensure migration to the platform which would address the needs of the transferee entity. The proposal shall also cover the steps proposed to be taken to handle issues which may arise in the interim period till such migration is complete to ensure amongst other things, that the interests of the policyholders are protected and they continue to be serviced without any interruption.
XVII. Projected Financial Statements of the Merged Entity:
The proposal for the scheme of arrangement shall be accompanied by projected financial statements of the merged entity as at the date of finalization of the scheme of arrangement. The financial statements shall be filed in the form and manner prescribed in the IRDA (Preparation of Financial Statements of Insurance Companies and Auditor’s Report thereof) Regulations, 2002. The applicants shall also file the financial condition report; IBNR Report and the Solvency Position of the transferee entity as at the date of finalization of the scheme of arrangement. These statements shall be duly signed by the respective signatories, as stipulated, of the entities associated with the transaction.