The issuance of Employee Stock Options (ESOPs) to Chief Executive Officer/Whole-time Director/Managing Director of Insurers has been expressly recognized since 2016 when the IRDAI issued the Guidelines on Remuneration of Non-executive Directors and Managing Director /Chief Executive Officer/Whole-time Directors of Insurers of 05 August 2016 (Guidelines). The Guidelines stipulate that ESOPs are to be kept outside the computation of the total remuneration but the extent of ESOPs granted by the Insurer should be reasonable.
The IRDAI while approving the remuneration of Whole-time Directors, Chief Executive Directors and Managing Directors, also considers the granting and/or vesting of ESOPs. In certain cases, the exercise of ESOPs by one or more key management persons (KMPs) whether singly or jointly would result in issuance of equity shares beyond the permissible threshold limits specified under §6A of Insurance Act 1938 (Insurance Act). §6A(4)(b) of Insurance Act stipulates that prior approval of the IRDAI is required:
- 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;
- 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.1
Further, the IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations 2015 (Transfer Regulations) expressly stipulate that any transfer of shares from existing shareholder to another person, including transmission and fresh issuance of equity shares which change the existing shareholding pattern of an insurance company, fall within the scope of "transfer of shares" for the purpose of Transfer Regulations, and where such transfer exceeds the prescribed thresholds, the Insurer is required to obtain the prior approval of the IRDAI in accordance with the prescribed procedure.
In light of the above, the IRDAI has issued a circular titled "Exercise of Employee Stock Options (ESOPs) – Applicability of provision of Section 6A(4) (b) of the Insurance Act, 1938" of 11 May 2021 (Circular) to clarify the requirement of obtaining prior approval of the IRDAI with regard to exercise of ESOPs. Pursuant to the Circular, the IRDAI has reiterated the following points:
- All ESOPs, at the time of grant, shall be reported to the IRDAI preferably as a part of the application filed under the Guidelines;
- Exercise of ESOPs shall be subject to §6A(4)(b) of Insurance Act, read with the provisions of the Transfer Regulations;
- Where a specific trust has been formed by an Insurer for issuance of ESOPs to their employees, the issue of shares to such trust and exercise of option by one or more employees shall also fall within the ambit of §6A(4)(b) of Insurance Act, read with the provisions of the Transfer Regulations;
- Where exercise of ESOPs by one or more KMPs whether singly or jointly is beyond the threshold limit specified in §6A(4)(b) of Insurance Act, prior approval of the IRDAI shall be sought before such exercise.
With the notification of the Circular, the IRDAI has reiterated that exercise of ESOPs by KMPs shall be subject to §6A(4)(b) of Insurance Act, read with the provisions of the Transfer Regulations and where exercise of ESOPs by one or more KMP, whether singly or jointly exceeds the prescribed threshold limits, prior approval of the IRDAI shall be sought before such exercise. With the notification of the Circular, going forward, Insurers are likely to consider taking on a more pragmatic approach at the stage of granting of ESOPs to KMPs, and take into consideration the logistics of obtaining regulatory approvals (if applicable) in the future, with regard to these ESOPs.
1. §6A(4) of the Insurance Act is 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.
Explanation.--For the purposes of this sub-clause, the expressions "group" and "same management" shall have the meanings respectively assigned to them in the Competition Act, 2002 (12 of 2003)."
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