Transfer Shares of an Insurance Company: The much-needed clarifications
The Insurance Regulatory and Development Authority of India (“IRDAI”) issued a circular (“Circular”) to all CMDs and CEOs of insurance and re-insurance companies on July 22, 2020, to further clarify the relevant issues. Transfer of shares of insurance companies and creation of mortgage on shares of insurance companies A brief summary of the clarifications given by the circular regarding transfer of shares of insurance companies is given below:
A. Clarification on IRDAI’s Guidelines for Transfer of Shares of Listed Companies
Section 6A(4)(b) of the Insurance Act, 1938 (“Insurance Act”) prescribes the requirement to obtain prior approval of IRDAI for:
- Any acquisition of 5% or more of the paid-up share capital of the insurance company by the transferor (section 6A(4(b)(ii)); and
- by any person, firm, group, constituents of a group, or body corporate under the same management, jointly or severally (Section 6A(4(b) )(iii)).
Pursuant to Section 6A(4)(b) of the Act, IRDAI issued the IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations, 2015 (“Transfer Regulations”) on April 23, 2015. These regulations prescribe the procedure to be followed by Indian insurance companies for obtaining IRDAI’s approval for transfer of shares that triggers the threshold set out in Section 6A(4)(b) of the Insurance Act.
IRDAI has notified the IRDAI (Issue of Capital by Indian Insurance Companies Carrying on Life Insurance Business) Regulations, 2015 and the IRDAI (Issue of Capital by Indian Insurance Companies Carrying on Other than Life Insurance Business) Regulations, 2015 (both referred to as the “Listing Regulations”). .) in December, 2015, to regulate the listing and public issue of share capital by Indian insurance companies.
The proviso to regulation 4(1) is common to both regulations that in the case of a listed Indian insurance company, transfer of shares other than public issue or offer for sale under SEBI rules, which triggers the threshold prescribed under Sec. 6A (4)(b) of the Insurance Act, specific prior approval of IRDAI will be required as per Transfer Regulations.
On August 5, 2016, IRDAI issued the IRDAI (Listed Indian Insurance Companies) Guidelines, 2016 (“Listed Companies Guidelines”) to liberalize regulatory requirements for secondary investments in equity share capital of listed Indian insurance companies. Among other things, the guidelines for listed companies sought to relax the approval requirements prescribed under Section 6A(4)(b) of the Insurance Act read with the Transfer Regulations.
This was done by IRDAI by allowing transfer of more than 1% but less than 5% of the paid-up equity share capital of a listed insurance company without taking the express approval of IRDAI (see Section 4 of the Listed. Companies Guidelines). However, IRDAI has not suggested any amendments to the Transfer Regulations to remove the need for approval. Further, no provisions of the Insurance Act have been amended to record the relaxation in approval requirements that was the result of the guidelines for listed companies.
In fact, the Listed Companies Guidelines indicate that IRDAI has not attempted to do away with the requirement of approval, but only transactions covered by Clause 4 of the Listed Companies Guidelines are “deemed to be approved” (within the framework of Section 6A(4) of the Insurance Act). (b)(iii)) as long as the person acquiring 1% but less than 5% of the paid-up equity share capital of a listed insurance company provides a “fit and proper” self-certification of the insurance company whose shares were being acquired. Further, consistent with Section 6A(4)(b) of the Insurance Act,
the guidelines for listed companies continued to require prior approval of an acquirer of 5% or more of the paid-up equity share capital of a listed insurance company. IRDAI. For this purpose, IRDAI is required to file Form A prescribed in the Guidelines of Listed Companies with IRDAI to seek its approval.
Clause 16 of the Listed Companies Guidelines further specified that the Guidelines are subject to Transfer Regulations and Listing Regulations. In so doing, the guidelines do not provide clarity on the approach to be followed for obtaining IRDAI’s approval for transactions not covered by Clause 4 of the listed company guidelines and whether a person transfers shares in excess of 5% or more paid-up. Prior approval of IRDAI is required for equity share capital of a listed insurance company. This resulted in confusion among market participants and stakeholders
On March 29, 2019, when BNP Paribas Cardiff (“BNP”), transferred 5.069% shares of SBI Life Insurance Company Limited (“SBI Life”) on the stock, the interpretation of the guidelines for listed companies was subsequently addressed by the regulator. Exchange without obtaining approval of IRDAI.
After receiving notification of the transaction from SBI Life, IRDAI issued a notice to SBI Life and BNP seeking clarification for not obtaining IRDAI’s approval. In response, BNP clarified that IRDAI’s approval was not sought as in its view the guidelines for listed companies require only the acquirer, and not the transferor, to hold priority of 5% or more of the paid-up equity share capital of the listed insurance company. .
Approval of insurance regulator. Based on the submissions made by BNP and SBI Life, IRDAI passed an order on December 23, 2019[1] holding BNP liable for violation of Section 6A(4)(b)(iii) of the Insurance Act. Transfer Regulations and Guidelines of Listed Companies not to seek prior approval of IRDAI for controversial transactions. IRDAI also held that in this case, BNP’s sole responsibility is to seek IRDAI’s approval for the transaction.
While the matter settles on the approval requirements applicable to the transfer of 5% or more of the paid-up share capital of an insurance company, the guidelines for listed companies have not clearly clarified the procedure for taking prior approval for share transfer. More than 5% of the paid-up equity share capital of a listed insurance company, especially when the acquirer is acquiring the shares from the open market where there may be multiple sellers selling the shares. This gap has now been filled by the circular, which has clarified as follows:
- Acquisition of more than 5% of paid-up equity share capital of a listed insurance company will require prior approval of IRDAI. Application for approval of IRDAI should be submitted through the concerned insurance company;
For transfer by the transferee of more than 5% of the paid-up equity share capital of a listed insurance company (cumulative with its relatives, associate enterprises and persons acting in concert), the transferee shall require its prior approval. IRDAI. An application - for pre-approval should be filed by the insurance company; And
- In case of transfer of more than 1% and up to 5% of the paid-up equity share capital of a listed insurance company, the transferee should inform the insurance company immediately after execution of the transaction.
It is to be mentioned that IRDAI has not clearly clarified the form that needs to be filled for approval for the above transfers. However, a combined reading of IRDAI’s Listed Companies Guidelines and Transfer Regulations, as evidenced by Clause 16 of the Listed Companies Guidelines and the order passed in BNP’s case,
shows that the application for approval for transactions in shares of listed insurance companies is in Form A prescribed by the Transfer Regulations and Form B is required to be filed. In case of an acquirer of 5% or more of the paid-up equity share capital of a listed insurance company, the application is also required to be supported by duly filled Form A as prescribed by the guidelines of the listed company.
The circular further clarifies that the threshold for deemed approval specified in Clause 4 of the Listed Companies Guidelines shall be considered after taking into account the existing shareholding of the acquirer. If the acquirer’s total holding in a listed insurance company is less than 5% of the paid-up equity share capital of the listed insurance company, the acquirer will not need to take prior approval of IRDAI for acquisition of shares in the listed insurance company. Company after completion of acquisition. In all such cases, a “fit and proper” self-certification shall be treated as valid approval under Section 6A(4)(b)(iii) of the Act and separate approval of IRDAI shall not be required.
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B. Clarifications regarding transfer of shares of unlisted and listed insurance companies completed by multiple transactions
Neither Section 6A nor the Transfer Regulations have clearly clarified the treatment of share transfers completed through multiple transactions, in order to provide for the requirement of obtaining IRDAI approval. In fact, in case of acquisition of shares, the language of Section 6A(4)(b)(ii) of the Insurance Act, Regulation 3(a) of the Transfer Regulations and Section 5 of the Listed Companies Guidelines suggests. That any additional share acquisition after the acquirer has received 5% of the paid-up equity shares will always require the approval of IRDAI[2]. IRDAI has now clarified through a circular that:
If an acquirer proposes to carry out multiple transactions to acquire shares of an unlisted insurance company, the prior approval of IRDAI as per Section 6A(4)(b)(ii) of the Insurance Act shall be required if the acquirer acquires cumulatively. 5% or more of the paid up equity share capital of the insurance company in a financial year. The requirement to seek IRDAI approval will start when the threshold of 5% mentioned in Section 6A(4)(b)(ii) of the Insurance Act is breached.
If the transferor proposes to carry out multiple transactions for sale of shares of an unlisted insurance company, prior approval of IRDAI will be required as per section 6A(4)(b)(iii) of the Insurance Act if the transferor transfers cumulatively. 1% or more of the paid-up equity share capital of the insurance company in a financial year. The requirement to seek IRDAI approval will start when the threshold of 1% mentioned in Section 6A(4)(b)(iii) of the Insurance Act is breached.
As far as listed insurance companies are concerned, the above conditions will be applicable only on transfer of shares by promoters/promoter group entities. However, IRDAI will also consider any ‘offer for sale’ as per SEBI (Issue of Capital and Disclosure) to determine whether prior approval of IRDAI is required for transfer of shares of a listed insurance company completed through multiple transactions in a financial year. Requirements) Regulation by existing shareholders, 2018, whether such shareholder is part of promoter/promoter group or not.
C. Consequences of Non-Compliance with the Circular
In order to monitor the compliance of the circular, IRDAI through clause E of the circular has imposed an obligation on insurance companies to report to IRDAI immediately if any non-compliance is found with the provisions of the Insurance Act, Rules. and guidelines framed thereunder and circulars issued by the Authority regarding transfer of shares.
Further, to justify the need to seek IRDAI’s approval for transactions requiring such approval, the circular states that transactions executed beyond the threshold limit set by the shareholders without the prior approval of IRDAI will authorize the transferee to exercise any voting rights. of insurance company meetings. Further, the transferee of such shares will also be required to immediately dispose of the excess shares acquired beyond the specified threshold to seek approval from IRDAI. Regulatory action will also be taken by IRDAI for non-compliance with approval requirements.
The penal provisions mentioned in the circular in effect make the transferor responsible for ensuring that necessary approvals are obtained from IRDAI for acquiring shares when such shares are purchased from multiple sellers. However, one wonders how a retail investor trading on a stock exchange would do such compliance when a defaulting shareholder offloads shares from the market.