REGULATION

OF
FINANCIAL SERVICES
IN
INDIA

SPECIAL REFERANCE TO IRDA

Group 1
 Financial Services

• Services provided by the Finance Industry.

• The finance industry encompasses a broad
range of organizations that deal with the
management of money.
 Regulators of Financial services in
India
• Reserve Bank of India (RBI).
• Securities and Exchange Board of India (SEBI).
• Forward Markets Commission (India) (FMC).
• Ministry Of Finance (MoF).
• High Level Coordination Committee (HLCC).
 Reserve Bank of India (RBI)

• The Reserve Bank of India was established on

April 1, 1935 in accordance with the
provisions of the Reserve Bank of India Act,
1934.

• Dr Duvvuri Subbarao is the

current Governor of RBI.
 Regulations of RBI

• Monetary Authority.

• Manager of exchange control.

• Issuer of currency.

• It also acts as banker to banks.

 Securities & Exchange Board of India
(SEBI)

• Securities & Exchange Board of India (SEBI) is

the regulator for the securities market in
India.
• SEBI was formed officially by the Govt of
India on April 12,1992 with SEBI Act 1992.
 Regulations of SEBI

• SEBI has to be responsive

to the needs of three
groups, which constitute
the market:
– Issuers of securities.
– Investors.
– Market intermediaries.
 Forward Market Commission (FMC)

• The Forward Markets Commission (FMC) is

the chief regulator of forwards and futures
markets in India.
• As of March 2009, it regulates 52 Trillion
worth of commodity trade in India under the
chairmanship of Mr. B.C. Khatua
 Regulations of FMC

• Recognition or the withdrawal of recognition.

• Keep forward markets under observation.

• Make recommendations on working of

forward markets.
 Insurance

• A contract (policy) in which an individual or

entity receives financial protection or
reimbursement against losses from an
insurance company.
• The company pools clients'
risks to make payments
more affordable for the
insured.
 Types of Insurance

• LIFE INSURANCE
– A protection against the loss of income that would
result if the insured passed away.
– The named beneficiary
receives the proceeds and
is thereby safeguarded
from the financial impact
of the death of the insured.
• e.g. LIC Jeevan Anand, LIC Money Bank Policy e.t.c
 Types of Insurance

• NON LIFE INSURANCE

– General insurance or non-life insurance policies,
provide payments depending on the loss from a
particular financial event.
– General insurance typically comprises any
insurance that is not determined to be life
insurance.
• e.g. Fire Insurance, Motor Car Insurance, Health
Insurance e.t.c.
 Types of Insurance

• REINSURANCE
– The practice of insurers transferring portions of
risk portfolios to other parties by some form of
agreement in order to reduce the likelihood of
having to pay a large obligation resulting from an
insurance claim.
– The intent of reinsurance is for an insurance
company to reduce the risks associated with
underwritten policies by spreading risks across
alternative institutions.
 INSURANCE REGULATORY
&
DEVELOPMENT AUTHORITY
• Insurance Regulatory and Development
Authority (IRDA) was constituted as per the
section 4 of IRDA Act' 1999, by an act of
parliament.
• To protect the interests of the
policyholders, to regulate, promote
and ensure orderly growth of the
insurance industry.
• HO – Hyderabad (AP)
 Functions Of IRDA

• Section 14 of IRDA Act, 1999 lays down the

duties, powers and functions of IRDA.
• Issue of Registration certificate
• Protection of the interests.
• Promoting efficiency
• Promoting and regulating professional
organisations.
 Functions Of IRDA

• Control and regulation function;

• Of the rates, advantages, terms and conditions .
• Specifying the form and manner in which books
of account shall be maintained.
• Regulating
– investment of funds by insurance companies.
– maintenance of margin of solvency.
• Adjudication of disputes between insurers and
intermediaries .
 Functions Of IRDA

• Supervising the functioning of the tariff advisory

committee; 
• Specifying the percentage of premium income of
the insurer;
• Specifying the percentage of life insurance
business and general insurance business ;
• Exercising such other powers as may be
prescribed
 Regulatory Framework
• The main regulations that regulate the insurance business
are :
– Insurance Act, 1938
– Life Insurance Corporation Act, 1956
– The General Insurance Business Act, 1982
– The Marine Insurance Act, 1963
– the Motor Vehicles Act, 1988
– The Indian Contract Act, 1872
– Foreign Exchange Management Act, 2000
– Income Tax Act, 1961
– Indian Stamp Act
– Hindu and Indian Succession Act
 Deposits

• Deposits to be made;
– Life Insurance co. `100 crores
– General Insurance co. ` 100 crores
– Reinsurance ` 200 crores
 Investment

• Every insurer is required to invest and keep invested certain

amount of assets :
– Govt. Securities 25%
– Govt. Securities or other approved securities not less than
50%
– Approved Investments
• Infrastructure and social sector: not less than 15%
– Other to be governed by exposure and prudential norms
not exceeding 35%
– Other than governed by exposure and prudential norms
not exceeding 15%
 Investment

– State Govt. and other govt. securities including

aforesaid- not less than 30%
– Housing and loans to state govt. for housing and fire
fighting equipment- not less than 5%
– Investments in approved investments
– Infrastructure and retail sector- not less than 10%
– Others to be governed by exposure prudential
norms-not exceeding 30%
– Other than in approved investments to be governed
by exposure prudential norms-not exceeding 25%
 Solvency margins

• An insurer should maintain, at all times, an

excess of the value of his assets over the
amount of his liabilities
 Submission of returns

• Every insurer should submit to the Authority the

returns, showing that as of 31st of December of the
preceding year
– The assets held and invested
– Investments made out of controlled fund
– All other particular necessary for Insurance Act
Compliance
 actuary

• An insurer Carrying the business of insurance

or reinsurance in India
• Should appoint actuary
• Under specified eligibilty criteria
• After seeking the approval of authority.

• As per Insurance Act 1938

• “actuary” means an actuary possessing such
qualifications as may be specified by the regulations
made by the Authority (IRDA).
 Insurance Advertisement

• An insurer who is coming with advt. must

take approval of IRDA
• Advt. should not be unfair and misleading
 Obligation to rural and social sector

• Every insurer has to design policy by taking

into consideration Rural population of India
• It should give importance to factors like
Income, Agriculture etc.
 Assignment & Nomination
• Assignment : A policy of insurance is a contract of
a personal nature and hence cannot be transferred
by the insured without the consent of the insurer.
• Nomination : A policy holder of a life insurance
policy on his own life has the right, either while
effecting the policy or before it matures, to
nominate a person to whom the money secured by
the policy should be paid in the event of the death
of the policy holder
 Forex Laws
• To issue general insurance policies denominated
in foreign currency.
• Permitted to receive premiums in foreign
currency .
– Marine insurance for vessels owned by foreign
shipping companies and chartered by Indian
companies
– Aviation insurance for aircrafts imported from outside
India on lease/hire basis for the purpose of air taxi
operations etc.
 TAX ASPECTS IN INSURANCE
• Insurance companies are subject to tax for the premiums
and the commissions received by them respectively,
under the Indian Income Tax Act, 1963.

• The Income Tax Act deals with the computation of the

income of the following insurance companies:
• Companies carrying on life insurance business which are
resident in India;
• Companies carrying on any other kind of insurance
business, which are resident in India;
• Non-resident persons carrying on the business
of insurance in India through a branch.
 STAMP DUTY

• An insurance policy needs to be duly stamped in

accordance with the stamp duty prescribed for
each kind of policy under the Indian Stamp Act,
1899 (“Stamp Act”).
• The rates of stamp duty on insurance policies are
the same throughout the territories of India.
• Generally, the stamp duty on a 20 life insurance
policy or group insurance is borne by the person
effecting the insurance.
RECENT REGULATORY INITIATIVES

• Distribution channel related changes:

• IRDA has amended: to remove any scope for the
involvement of unlicensed personnel/entities in the sale of
insurance products.
• To further tighten the Code of Conduct of corporate agents
to ensure that the prospect does not deal with any
unlicensed person.
• The Regulations have also been amended to ensure that
there is no scope for any kind of remuneration other than
commission where sale has been effected. This measure will
reduce the expenses of the insurer, thereby lowering
premiums to be paid by the policyholder.
RECENT REGULATORY INITIATIVES

• REGULATION FOR REFERRALS:

– Companies which wish to share their database of customers
with insurers
• would need to get approval from IRDA after having
conformed to the requirements as laid down in the
Regulations.
• For instance, the referral company shall not be in any
business of extending loans and advances or accepting
deposits
• The Regulations cast obligations on the referral company as
well as the insurer including submission of data as and
when called for by the Authority.
ULIP STRUCTURE AND RELATED CHANGES

• Lock in period increased to five years:

• Even Distribution of Charges on ULIPs during the
lock in period
• Increase In Risk Component: Further, all unit
linked products, other than pension and annuity
products shall provide a mortality cover
• Minimum guaranteed return for pension
products (4.5% p.a)
 DISCONTINUATION OF CHARGES

• IRDA has also addressed the issue of discontinuance of

charges for surrender of ULIPs.
• Regulations brought out by IRDA in this regard ensure
that policyholders do not get overcharged when they
wish to discontinue their policies for any emergency cash
requirement.
• The Regulations stipulate that an insurer shall recover
only the incurred acquisition costs and that these charges
are not excessive. .
 DISCONTINUATION OF CHARGES

• The discontinuance charges have been capped both as

percentage of fund value and premium and also in
absolute value.
• Upon discontinuance of a policy, a policyholder shall be
entitled to exercise an option of either reviving the policy
or completely withdrawing from the policy without any
risk cover. Further, the regulations also enable IRDA to
order refund of discontinuance charges in case they are
found excessive on enquiry.
• These regulations are applicable to all new ULIP products
approved by IRDA after these regulations are notified.