Independent Due Diligence of Investments by IIOs under IFSCA Regulations

International Financial Service Centre Insurance Offices (IIOs) operating in GIFT IFSC are required to follow a prudential investment framework under the IFSCA (Investment by International Financial Service Centre Insurance Office) Regulations, 2022. One important governance requirement under this framework is the obligation to conduct independent due diligence on proposed investments, in addition to considering the rating assigned by rating agencies.

This requirement is significant because insurance and reinsurance entities manage funds that must remain aligned with liabilities, solvency requirements, liquidity needs and regulatory exposure limits.

What Does the IFSCA Regulation Require?

Regulation 15 requires every IIO to have its own prudential mechanisms to evaluate, monitor, measure, report, control and limit its investment exposure. It further requires the IIO to conduct independent due diligence on proposed investments in addition to the rating given by rating agencies.

The regulation therefore makes it clear that reliance on an external credit rating alone is not sufficient. The IIO is expected to make its own assessment before committing funds.

At the same time, the regulation does not prescribe a detailed due diligence format or a standard checklist. This gives IIOs flexibility to design a process proportionate to the nature, size, complexity and risk profile of the proposed investment.

Key Areas of Independent Investment Due Diligence

A robust due diligence process should examine the investment from both a financial and regulatory perspective.

Financial and Credit Assessment

The IIO should review the financial strength of the investee or issuer, including:

• revenue and profitability trends;
• leverage and capital structure;
• debt-servicing ability;
• operating and free cash flows;
• liquidity position;
• credit profile; and
• ability to meet repayment or redemption obligations.

For debt instruments, particular attention should be given to repayment capacity, security cover, covenants and downside risk.

Instrument-Level Review

The terms of the proposed investment should also be analysed, including:

• coupon or expected return;
• maturity;
• redemption conditions;
• security or collateral;
• ranking of the instrument;
• conversion rights, where applicable; and
• other contractual protections.

The objective should be to understand not only the expected return but also the risks embedded in the structure of the investment.

Regulatory Eligibility

Independent due diligence should also confirm whether the proposed investment falls within the permitted regulatory framework.

This includes checking:

• whether the asset class is permitted;
• whether the jurisdiction is eligible;
• applicable credit-rating requirements;
• sovereign-rating requirements; and
• whether post-investment exposure remains within prescribed limits.

The regulations impose different limits based on asset class, credit quality, sovereign rating and concentration.

Concentration Impact

The proposed investment should be evaluated in the context of the overall investment portfolio.

For example, Regulation 14 limits exposure to:

• a single investee;
• the IIO’s own group;
• another group; and
• a particular industrial sector.

Therefore, an investment may appear acceptable on a standalone basis but still create a concentration breach at the portfolio level.

Liquidity and Realisability

The IIO should consider whether the investment is sufficiently liquid and realisable when required.

This is especially important because the regulations require IIOs to maintain assets having a value not less than liabilities while considering factors such as nature, duration, currency and uncertainty of investments.

Due Diligence Should Go Beyond Credit Ratings

An external rating is useful, but it is only one input in the investment decision.

Independent due diligence should consider risks that may not be fully reflected in a rating, such as recent deterioration in financial performance, promoter or group concerns, liquidity constraints, unusual instrument terms, marketability, jurisdiction risk, currency exposure and maturity mismatch.

This is particularly relevant where market conditions or issuer-specific developments have changed after the latest rating review.

Role of Internal Audit in Reviewing Due Diligence

Internal audit should not replace management’s responsibility for carrying out investment due diligence.

Its role should be to assess whether:

• due diligence was actually performed;
• the assessment was sufficiently independent;
• the analysis was appropriate to the investment risk;
• regulatory eligibility and exposure limits were checked; and
• conclusions were supported by appropriate records.

This complements the separate requirement under Regulation 16 for internal control systems, including internal audits for investments.

Conclusion

Independent due diligence is an important part of investment governance for IIOs in GIFT IFSC. A sound process should combine financial analysis, instrument-level review, regulatory eligibility, concentration testing and liquidity assessment. By going beyond external ratings, IIOs can strengthen investment decision-making, improve risk oversight and demonstrate compliance with the prudential expectations of IFSCA.