Article. IRDA (Investment) Regulations, glance at investment zones and compliances. Pammy Jaiswal

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1 Article IRDA () Regulations, glance at investment zones and compliances Pammy Jaiswal Corporate Law Services Group 27 th September, 2016 Check at: for more write ups. Copyright: This document is the property of Vinod Kothari & Company and no part of it can be copied, reproduced or distributed in any manner. Disclaimer: This document is intended to initiate academic debate on a pertinent question. It is not intended to be a professional advice and should not be relied upon for real life facts.

2 Introduction The Insurance Regulatory and Development Authority of India ( IRDA or Authority ) has come up with the IRDA () Regulations, 2016 ( Regulation, 2016 ) vide its notification dated 1 st August, covering the limits set for the investments that can be made by insurance companies and the bunch of compliances expected from such insurance companies in respect of such investments. The Regulation, 2016 supercedes the erstwhile IRDA Regulations, 2000, therefore the insurance companies making new investments will need to follow the provisions of the Regulations, The Regulations, 2016 cover the limits and compliances in respect of investments for both life as well as general insurers. However, this write-up covers the provisions with respect to general insurance only. General Insurance Business Insurance other than Life Insurance falls under the category of general insurance. General insurance comprises of insurance of property against fire, burglary etc., personal insurance such as accident and health insurance, and liability insurance which covers legal liabilities. There are also other covers such as errors and omissions insurance for professionals, credit insurance etc. Non-life insurance companies have products that cover property against fire and allied perils, flood storm and inundation, earthquake and so on. There are products that cover property against burglary, theft etc. The non-life companies also offer policies covering machinery against breakdown, there are policies that cover the hull of ships and so on. A marine cargo policy covers goods in transit including by sea, air and road. Further, insurance of motor vehicles against damages and theft forms a major chunk of non-life insurance business. General insurance business houses have premium as their major source of income from their policyholders. In order to meet the claim of the policyholders, they need lump sum amount of money which they usually get because they keep their assets invested in the manner prescribed by the Authority. Hence, the extent and the projects or securities in which the insurance companies should invest should be wisely chosen by the insurance companies. Where to Invest? Insurance houses can either invest in approved securities or in approved investments. Section 2 (3) of the Insurance Act, 1938 ( Act ) defines approved securities. Approved securities include: government securities; 1

3 other securities chargeable to the revenue of the Central Government; securities which are fully guaranteed by the State or Central Government; debentures or other securities issued under a Central or State Legislature Act or issued on behalf of a port trust, municipal corporation, or a city improvement trust in any Presidency town; shares of a corporation guaranteed fully by the Central or the State Government with regard to the payment of principal and dividend; and Securities issued or guaranteed by the Government and specified as approved securities for the purpose of this Act. As per Regulation 3 (a) of the Regulations, 2016, approved investments include: debentures secured by a first charge on any immoveable property plant or equipment of any company which has paid interest in full; debentures secured by a first charge on any immovable property, plant or equipment of any company where either the book value or the market value, whichever is less, of such property, plant or equipment is more than three times the value of such debentures; first debentures secured by a floating charge on all its assets of any company which has paid dividends on its equity shares; preference shares of any company which has paid dividends on its equity shares for at least two consecutive years immediately preceding; equity shares of any listed company on which not less than ten percent dividends have been paid for at least two consecutive years immediately preceding; immovable property situated in India, provided that the property is free of all encumbrances; loans on policies of life insurance within their surrender values issued by him or by an insurer whose business he has acquired and in respect of which business he has assumed liability; fixed deposits with banks included for the time being in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934) and; such other investments as the Authority may, by notification in the Official Gazette, declare to be Approved s. In addition to the above there is also a concept of deemed approved investments laid down in the Regulations, 2016 in which the insurance houses can invest.

4 As per Regulation 3 (b) deemed approved investments include investment in: all rated debentures and other secured debt instruments which have been rated; equity shares, preference shares and debt instruments issued by All India Financial Institutions ( AIFI ) duly recognized by Reserve Bank of India ( RBI )- provided that such investment shall be made in terms of investment policy guidelines, benchmarks and exposure norms, limits approved by the Board of Directors of the insurer; bonds and debentures rated not less than AA or its equivalent and A1 or equivalent ratings for short term bonds, debentures, certificate of deposits and commercial papers by a credit rating agency, registered under SEBI (Credit Rating Agencies) Regulations 1999; deposits in banks (e.g. in current account, call deposits, notice deposits, certificate of deposits etc.) included for the time being in the Second Schedule to RBI Act, 1934 (2 of 1934) and deposits with primary dealers duly recognized by RBI as such subject to the norms and limits approved by the Board of Directors of the insurer; Collateralized Borrowing & Lending Obligations (CBLO) created by the Clearing Corporation of India Ltd and recognized by the RBI and exposure to Gilt, G Sec and liquid mutual fund forming part of approved investments as per Mutual Fund Guidelines issued under these regulations and money market instrument/ investment; asset backed securities with underlying housing loans or having infrastructure assets as underlying as defined under infrastructure facility in Regulation 2 (h) as amended from time to time; commercial papers issued by AIFIs recognized by RBI having a credit rating of A1 by a credit rating agency registered under SEBI (Credit Rating Agencies) Regulations 1999; money market instruments as defined in Regulation 2(j) of the Regulation, 2016, subject to provisions of approved investments. Investing otherwise In case the insurer proposes to invest or has kept invested otherwise than in approved investment, the same should be in compliance with section 27A (ii) of the Act which requires that the if the investment is made, or, in the case of any investment already made, the continuance of such investment should be with: the consent of all the directors present at a meeting and eligible to vote; special notice of which should be given to all the directors then in India; and all such investments, including investments in which any director is interested, are reported without delay to the Authority with full details of the investments and the extent of the director's interest in any such investment.

5 However, the Regulations, 2016 provides that the Board may delegate such powers to the Committee who in turn shall be responsible for the details, analysis and review of nonperforming assets of investments on a quarterly periodicity. The insurer shall report compliance of this provision to the Authority through Form 4. Where not to invest? Unless specifically permitted by the Authority, no investment can be made in: any entity not formed under laws relating to companies in India; or in any private limited company; or one person company; and a company formed under section 8 of the Companies Act, Returns to be submitted by an insurer Every insurer shall submit to the Authority the following returns (in physical / electronic mode) within such time, at such intervals duly verified/certified in the manner given below: Sl. No Form Description Periodicity of filing Time limit for submission Verified / Certified by 1. Form 1 Statement of Quarterly Within 30 days Principal Officer and of the end of / Chief Income on the quarter of / Chief of (Finance) 2. Form 2 (Part A, B, C) Statement of Downgraded s, Details of Rated Instruments 3. Form 3A Statement of (Part A, B, C, D, E) s Assets (Life Insurers) 4. Form 3B Statement of (Part A, B) Assets (General Insurer including an insurer carrying on business of reinsurance or health insurance) 5. Form 4 Exposure / Prudential

6 Sl. No Form Description Periodicity of filing and other (Part A) Norms Compliance Certificate Time limit for submission Verified / Certified by 6. Form 4 Internal / Concurrent Auditor's (Part B) Certificate on Risk Management Systems - Implementation Status 7. Form 4A Statement of Subject to (Part A, B, C, Exposure Norms D) Investee Company, Group, Promoter Group, Industry Sector 8. Form 5 Statement of Reconciliation 9. Form 6 Certificate under Sec 27A (5) 10. Form 7 Statement of Non- Performing Assets IRDA has come up with the guidelines on return filing 2 by the insurance companies in order to facilitate and ease the process of filing returns. Each form contains objective, method of preparation and other notes related to the particular form. 2

7 Provisions on Management Committee Audit and Reporting Management Provisions Policy Risk Management System Operations The above diagram has been discussed in detail below: A. Committee Every insurer shall constitute an Committee which shall consist of: a minimum of two non-executive directors, the Chief Executive Officer, the Chief of Finance, the Chief Risk Officer, the Chief of division, and the Appointed Actuary The Board of the Insurer shall ensure that Chief of Finance, Chief of and the Chief Risk Officer, shall fulfil the minimum qualification requirements specified in the regulations / guidelines issued by the Authority. The IRDA (Corporate Governance) Guidelines, 2016 ( CG Guidelines ) also mandates the constitution of the investment committee with the same composition. The decisions taken by the investment committee shall be recorded and be open to inspection by the officers of the Authority. B. Policy Every insurance company shall formulate an Policy (IP) and place the same before its Board for its approval and the same shall be implemented by the Committee. While drafting IP the Board shall ensure compliance with the following:

8 i. issues relating to liquidity, prudential norms, exposure limits, stop loss limits including securities trading, management of all investment risks, management of assets liabilities mismatch, Scope of Internal or Concurrent audit of s, criteria form empanelment and review of investment brokers, investment statistics and all other internal controls of investment operations, the provisions of the Insurance Act, 1938 and IRDAI () Regulations, Guidelines and Circulars made there under and ii. ensuring adequate return on policyholders and shareholders funds consistent with the protection, safety and liquidity of such fund(s). The Board shall review the IP and its implementation on a half-yearly basis or at such short intervals as it may decide and make such modification to the IP as is necessary to bring it in line with the investment provisions laid down in the Act and Regulations made there under, keeping in mind protection of policyholders interest and pattern of investment laid down in the Regulations, C. Operations The funds of the insurer should be invested in such securities which are rated as prescribed under the Regulations, 2016 by a credit rating agency, registered under SEBI (Credit Rating Agencies) Regulations, To ensure proper internal control of investment functions and operations the insurer shall clearly segregate the functions and operations of front, mid and back office as provided in the Guidance note on Internal / Concurrent Audit of functions of Insurance Companies issued by the Institute of Chartered Accountants of India as required under Chapter II, Regulation 7 (3) (b) of IRDAI (Registration of Indian Insurance Companies) Regulations. Functions falling under front, mid and back office shall not be outsourced. Also, the primary data server of the computer application used for investment management shall remain within the country. The Board of the insurer shall appoint a custodian to carry out the custodial service for its investments, who shall not be an entity under its promoter Group unless permitted otherwise by the Authority. D. Risk Management Systems and its Review The Board of the insurer company shall implement the Risk Management Systems and Process (IRMSP) whose implementation shall be certified by a Chartered Accountant firm, as per the procedure laid down in the Guidance note on Review and Certification of Risk Management Systems and Process of Insurance Companies, issued by the Institute of Chartered Accountants of India, as amended from time to time.

9 The IRMSP shall be reviewed once in two financial years or such shorter frequency as decided by the Board of the insurer (the gap between two such audits should not be more than two years), by a Chartered Accountant firm and file the certificate issued by such Chartered Accountant, with the Authority along with the first quarter returns. E. Audit and Reporting to Management Every insurer shall constitute an Audit Committee of the Board, headed by an individual, as per the CG Guidelines, however, such person shall not chair the investment committee. Insurers shall have the investment transactions covering both shareholders and policyholders funds audited through internal or concurrent auditor as per the circular issued under this regulation. The quarterly internal / concurrent audit report, covering investments of both shareholders as well as policyholders, shall be as per the Guidance note on Internal / Concurrent Audit of functions of Insurance Companies issued by the Institute of Chartered Accountants of India, as amended from time to time; The details of IP, implementation status of IRMSP or its review shall be made available to the internal or concurrent auditor. The auditor shall comment on implementation status, review and its impact on the investment operations, systems and process in their report to be placed before the Board s Audit Committee. The statutory auditor of the insurer shall, on a quarterly basis, confirm compliance to Regulation 13(B) (4) (a, b) and such confirmation, shall be filed by the insurer along with periodical investment returns. Conclusion The earlier investment regulations issued by IRDA presented tits and bits of the investment compliance required to be done on the part of the insurer companies while Regulation, 2016 is a comprehensive legal framework for insurance companies to make, regulate and monitor investments in due compliance with the provisions of the Act and the Regulations, 2016 or any other applicable regulations or provisions. To read our articles on Companies Act, 2013 click here To read our other resources click here