By way of an Order dated 24 February 2020, 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 IRDAI Order dated 4 December 2019, which held that the pledge of shares of an Insurer requires prior approval of the IRDAI under §6A(4)(b)(iii) of the Insurance Act 1938 (Insurance Act) and any pledge of shares without IRDAI's approval 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 §6A(4)(b) of the Insurance Act appears to have been left open.
Now, with an intent to clarify issues pertaining to pledge and transfer of shares of insurance companies by promoters/shareholders, the IRDAI in exercise of its powers under §14(1) of IRDA Act 1999 read with R10 of the IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations 2015 (Transfer Regulations) has issued a circular titled "Transfer of Shares of the Insurance Companies" of 23 July 2020 (IRDAI Circular). A summary of the key clarifications issued under the IRDAI Circular are provided below:
- Transfer/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 is required to inform the listed Insurer immediately on the execution of the transaction. The transferor is required to ensure compliance for any transaction(s) aggregating to more than 1% of the paid-up capital. It is noteworthy that 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 his/her relatives, associate enterprises and persons acting in concert will/is likely to exceed 5% of the paid up share capital of the insurance company, such transferor is required to seek the prior approval of the IRDAI as per §6A(4)(b)(iii) of the Insurance Act, read with provisions of 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 paid-up share capital of the insurance company, has to be submitted for prior approval to the IRDAI. The applications for these purposes are required to be filed through the concerned insurance company.
- Quantum of
transfer: For the purpose of calculating the quantum
of transfer/acquisition of shares in scenarios where transfer is
executed in favour of one or more parties, the cumulative transfers
made during a given financial year are required to be
considered. Accordingly, whenever the specified limits are
likely to exceed in a financial year, prior approval of the IRDAI
is required to be obtained in accordance with prescribed
For listed Insurers the above condition will only be applicable with respect to the transfer/acquisition made by the promoters/promoter group, however, for calculating the quantum of transfer, ‘offer of sale' made per the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018, by the existing shareholders will also be considered.
- Pledge of shares: It is now clarified that the provisions with respect to transfer of shares set out under §6A(4)(b) of the Insurance Act and the Transfer Regulations will apply mutatis-mutandis to the creation of pledge or any other kind of encumbrance over shares of an Insurer, by its promoters.
- Suspension of voting rights: Insurance companies are required to immediately inform the IRDAI if any non-compliance is observed with regard to applicable provisions on transfer of shares. If the transactions are executed beyond the stipulated threshold limits without the approval of the IRDAI, the Insurer is required to ensure that the transferee shareholder does not exercise any voting rights in the meetings of the Insurer. In such a scenario the transferee will be required to promptly dispose of excess shares acquired.
- Regulatory Action: The IRDAI has clarified that the IRDAI may take necessary action for non-compliance of provisions of the IRDAI Circular as per the extant legal and regulatory framework.
The IRDAI Circular provides some much awaited clarifications on the applicability of the transfer of shares, provisions on pledge and hypothecation of shares. However, clarity on certain aspects is still awaited, such as: (a) the IRDAI Circular is silent on the timelines within which the IRDAI may approve or reject applications for share transfer/creation of pledge; (b) it is unclear whether a separate prior approval is required for invocation of a pledge created with the IRDAI approval; (c) the IRDAI Circular is also silent on the validity of a shareholders' resolutions (if any) passed in violation of the voting norms prescribed under the IRDAI Circular.
The IRDAI Circular attempts to address the past concerns surrounding transfer of shares by Insurers, calculation of the threshold limits, requirement of the IRDAI's approval in case of pledge etc. However, certain practical concerns remain with respect to the applicability of the provisions of transfer of shares. It remains to be seen how the market players react to the new restrictions on pledge and hypothecation of the shares and whether any further clarifications will be issued to address the aspects on which the IRDAI Circular is currently silent.
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