By way of a 24 February 2020 order, the Securities Appellate Tribunal, in relation to an appeal filed by Nippon India Mutual Fund and Nippon Life India Asset Management, partly set aside an Insurance Regulatory Development Authority of India (IRDAI) order of 4 December 2019 which held that:
- the pledge of shares of an insurer requires the IRDAI's prior approval under Section 6A(4)(b)(iii) of the Insurance Act 1938; and
- without the IRDAI's approval, any pledge of shares is "null and void ab initio".
However, the question as to the definition of 'transfer' and whether a pledge constitutes a transfer of shares under Section 6A(4)(b) of the Insurance Act appears to have been left open.
In order to clarify issues pertaining to the pledge and transfer of shares of insurers by promoters and shareholders, the IRDAI – in exercising its powers under Section 14(1) of the Insurance Regulatory and Development Authority Act 1999 read with Regulation 10 of the IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations 2015 (transfer regulations) – issued the Circular on the Transfer of Shares of Insurers of 23 July 2020 (the IRDAI circular). This article summarises the key clarifications set out in the IRDAI circular.
Transfer and acquisition of shares of listed insurers
In addition to providing a fit-and-proper declaration for transfers in excess of 1% (in aggregate) but less than 5% of the paid-up share capital, the transferor must inform the listed insurer immediately on the execution of the transaction. The transferor must ensure compliance for any transaction aggregating more than 1% of the paid-up capital. The onus of compliance rests on the transferor and not on the transferee.
Requirement of obtaining prior approval for transfers
Where the transfer of shares by the transferor – cumulative with their relatives, associate enterprises and persons acting in concert – will or is likely to exceed 5% of the insurer's paid-up share capital, such transferor must seek the IRDAI's prior approval as per Section 6A(4)(b)(iii) of the Insurance Act read with the IRDAI (Listed Indian Insurance Companies) Guidelines 2016. Similarly, any proposal for acquisition whereby the transferee's holding is likely to exceed 5% of the insurer's paid-up share capital must be submitted to the IRDAI for prior approval. Such applications must be filed through the concerned insurer.
Quantum of transfer
For the purpose of calculating the quantum of the transfer or acquisition of shares in scenarios where the transfer is executed in favour of one or more parties, the cumulative transfers made during a given financial year must be considered. Accordingly, whenever the specified limits are likely to be exceeded in a financial year, the IRDAI's prior approval must be obtained in accordance with the prescribed norms.
For listed insurers, the above condition applies only with respect to the transfer or acquisition made by the promoters or promoter group; however, in calculating the quantum of the transfer, the offer of sale made by the existing shareholders as per the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations 2018 will also be considered.
Pledge of shares
The IRDAI clarified that the provisions with respect to the transfer of shares set out under Section 6A(4)(b) of the Insurance Act and the transfer regulations will apply mutatis mutandis to the creation of a pledge or any other kind of encumbrance over shares of an insurer by its promoters.
Suspension of voting rights
Insurers must immediately inform the IRDAI of any non-compliance with the applicable provisions on the transfer of shares. If the transactions are executed beyond the stipulated threshold limits without the IRDAI's approval, the insurer must ensure that the transferee shareholder does not exercise any voting rights in the insurer's meetings. In such a scenario, the transferee must promptly dispose of excess shares acquired.
Regulatory action
The IRDAI has clarified that it may take necessary action against non-compliance with the IRDAI circular as per the extant legal and regulatory framework.
The IRDAI circular provides some much-awaited clarification on the applicability of the transfer of shares and the provisions on the pledge and hypothecation of shares. However, the following aspects remain unclear:
- The IRDAI circular is silent on the timelines within which the IRDAI may approve or reject applications for a share transfer or the creation of a pledge.
- It is unclear whether a separate prior approval is required for the invocation of a pledge created with the IRDAI's approval.
- The IRDAI circular is also silent on the validity of shareholders' resolutions (if any) passed in violation of the voting norms prescribed under the IRDAI circular.
The IRDAI circular attempts to address past concerns surrounding:
- the transfer of shares by insurers;
- the calculation of the threshold limits; and
- the requirement to obtain the IRDAI's approval in the case of a pledge.
However, certain practical concerns remain with respect to the applicability of the provisions on the transfer of shares. It remains to be seen how market players react to the new restrictions on the pledge and hypothecation of shares and whether any further clarifications will be issued to address the aspects on which the IRDAI circular is silent.
