Introduction

The issuance of employee stock options (ESOPs) to CEOs, whole-time directors and managing directors of insurers has been expressly recognised since 5 August 2016, when the Insurance Regulatory and Development Authority of India (IRDAI) issued the Guidelines on Remuneration of Non-executive Directors/Managing Directors/Chief Executive Officers/Whole-time Directors of Insurers. The guidelines stipulate that ESOPs must be kept separate to the calculation of total remuneration, but that the extent of ESOPs granted by insurers should be reasonable.

When approving the remuneration of CEOs, whole-time directors and managing directors of insurers, the IRDAI considers the granting or vesting of ESOPs. In certain cases, the exercise of ESOPs by one or more key management persons (KMPs), whether individually or jointly, will result in the issuance of equity shares beyond the permissible thresholds specified in Section 6A of the Insurance Act 1938. Section 6A(4)(b) of the Insurance Act stipulates that the IRDAI's prior approval is required:

  • where, after the transfer, the total paid-up holding of the transferee in the shares of the company is likely to exceed 5% of its paid-up capital; and
  • where the nominal value of the shares intended to be transferred by any individual, firm, group, constituents of a group or body corporate under the same management, jointly or severally, exceeds 1% of the paid-up equity capital of the insurer.(1)

Further, the IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations 2015 (Transfer Regulations) expressly stipulate that any transfer of shares from an existing shareholder to another person, including the transmission and fresh issuance of equity shares which change the existing shareholding pattern of an insurer, falls within the scope of a 'transfer of shares' for the purpose of the Transfer Regulations. Where such transfer exceeds the prescribed thresholds, the insurer must obtain the IRDAI's prior approval in accordance with the prescribed procedure.

Clarifications

In light of the above, on 11 May 2021 the IRDAI issued a circular titled "Exercise of Employee Stock Options (ESOPs) – Applicability of Provision of Section 6A(4) (b) of the Insurance Act 1938" to clarify the requirement to obtain the IRDAI's prior approval with regard to the exercise of ESOPs. In the circular, the IRDAI has reiterated the following points:

  • All ESOPs, at the time of grant, must be reported to the IRDAI, preferably as part of the application filed under the guidelines.
  • The exercise of ESOPs is subject to Section 6A(4)(b) of the Insurance Act, read with the Transfer Regulations.
  • Where an insurer has formed a specific trust to issue ESOPs to its employees, the issue of shares to such trust and the exercise of options by one or more employees will also fall within the ambit of Section 6A(4)(b) of the Insurance Act, read with the Transfer Regulations.
  • Where the exercise of ESOPs by one or more KMPs, whether individually or jointly, exceeds the thresholds specified in Section 6A(4)(b) of the Insurance Act, the IRDAI's prior approval is required.

Comment

With this circular, the IRDAI has reiterated that:

  • the exercise of ESOPs by KMPs is subject to Section 6A(4)(b) of the Insurance Act, read with the Transfer Regulations; and
  • where the exercise of ESOPs by one or more KMP, whether individually or jointly, exceeds the prescribed thresholds, the IRDAI's prior approval is required.

Going forward, insurers are likely to take a more pragmatic approach at the stage of granting ESOPs to KMPs and to consider the logistics of obtaining regulatory approvals (if applicable) with regard to ESOPs.

 

Endnotes

(1) Section 6A(4) of the Insurance Act reads as follows:

6A. Requirements as to capital structure and voting rights and maintenance of registers of beneficial owners of shares

(4) A public company as aforesaid which carries on life insurance business, general and health insurance business and re-insurance business

(b) shall not register any transfer of its shares--

(i) unless, in addition to compliance being made with the provisions of section 56 of the Companies Act, 2013 (18 of 2013), the transferee furnishes a declaration in the prescribed form as to whether he proposes to hold the shares for his own benefit or as a nominee, whether jointly or severally, on behalf of others and in the latter case giving the name, occupation and address of the beneficial owner or owners, and the extent of the beneficial interest of each;

(ii) where, after the transfer, the total paid-up holding of the transferee in the shares of the company is likely to exceed five per cent. of its paid-up capital unless the previous approval of the Authority has been obtained to the transfer;

(iii) where, the nominal value of the shares intended to be transferred by any individual, firm, group, constituents of a group, or body corporate under the same management, jointly or severally exceeds one per cent. of the paid-up equity capital of the insurer, unless the previous approval of the Authority has been obtained for the transfer.

For the purposes of this subclause, the terms 'group' and 'same management' have the meanings assigned to them in the Competition Act 2002 (12/2003).