18 March 2021
The Insurance Regulatory and Development Authority of India (“IRDAI”) issued a circular (“Circular”) on July 22, 2020 to all CMDs and CEO of insurance and re-insurance companies with a view to bring more clarity on issues relating to the transfer of shares of insurance companies and the creation of pledge over shares of insurance companies Set out below is a brief summary of the clarifications provided by the Circular in relation to transfer of shares of an insurance company:
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 of obtaining prior approval of the IRDAI for:
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any acquisition of 5% or more of the paid-up share capital of an insurance company by a transferee (Section 6A(4(b)(ii)); and
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any transfer of 1% or more of the paid-up share capital of an insurance company by any individual, firm, group, constituents of a group, or body corporate under the same management, either jointly or severally (Section 6A(4(b)(iii)).
Pursuant to Section 6A(4)(b) of the Act, the 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 the approval of the IRDAI for a transfer of shares which triggers the thresholds set out in Section 6A(4)(b) of the Insurance Act.
The IRDAI notified the IRDAI (Issuance of Capital by Indian Insurance Companies transacting Life Insurance Business) Regulations, 2015 and the IRDAI (Issuance of Capital by Indian Insurance Companies transacting other than Life Insurance Business) Regulations, 2015 (both being the “Listing Regulations”) in December, 2015, for regulating the listing and public issue of share capital by Indian insurance companies. The proviso to Regulation 4(1) common to both regulations states that in case of a listed Indian insurance company, a transfer of shares other than pursuant to a public issue or offer for sale under SEBI regulations, which triggers the thresholds laid down under section 6A (4)(b) of the Insurance Act, shall require the specific prior approval of the IRDAI in accordance with the Transfer Regulations.
On August 5, 2016, the IRDAI issued the IRDAI (Listed Indian Insurance Companies) Guidelines, 2016 (“Listed Companies Guidelines”) for liberalising regulatory requirements for secondary investments in the equity share capital of listed Indian insurance companies. Among other things, the Listed Companies Guidelines sought to relax the approval requirements which were prescribed under Section 6A(4)(b) of the Insurance Act, read with the Transfer Regulations. This was done by the IRDAI by allowing among other things transfers in excess of 1% but less than 5% of the paid-up equity share capital of a listed insurance company without taking an express approval of the IRDAI (See Clause 4 of the Listed Companies Guidelines). However, the IRDAI did not prescribe any amendments to the Transfer Regulations to do away with the approval requirement. Further, no provisions of the Insurance Act were amended to take on record the relaxation in the approval requirements which were a consequence of the Listed Companies Guidelines. In fact, the Listed Companies Guidelines suggest that the IRDAI did not seek to do away with the approval requirement, but only considered transactions covered by Clause 4 of the Listed Companies Guidelines to be “deemed approved” (within the frame work of Section 6A(4)(b)(iii) of the Insurance Act) as long as the person acquiring 1% but less than 5% of the paid-up equity share capital of a listed insurance company furnished a “fit and proper” self-certification to the insurance company whose shares were being acquired. Further, consistent with Section 6A(4)(b) of the Insurance Act, the Listed Companies Guidelines continued to require an acquirer of 5% or more of the paid-up equity share capital of a listed insurance company to take prior approval of the IRDAI. For this purpose, the IRDAI required acquirers to file Form A prescribed in the Listed Companies Guidelines with the IRDAI for taking its approval. Clause 16 of the Listed Companies Guidelines further specified that the guidelines were subject to the Transfer Regulations and the Listing Regulations. In doing so, the guidelines did not provide clarity on the approach to be followed for seeking IRDAI’s approval for transactions not covered by Clause 4 of the Listed Companies Guidelines and whether a person transferring shares in excess of 5% or more of the paid-up equity share capital of a listed insurance company required prior approval of the IRDAI. This eventually resulted in confusion among market participant and stakeholders.
The interpretation of the Listed Companies Guidelines subsequently came to be addressed by the regulator when BNP Paribas Cardif (“BNP”), on March 29, 2019, transferred 5.069% shares of SBI Life Insurance Company Limited (“SBI Life”) on the stock exchange without obtaining the IRDAI’s approval. Upon receiving notification of the transaction from SBI Life, the IRDAI issued notices to SBI Life and BNP seeking clarification for not obtaining IRDAI’s approval. In response, BNP clarified that IRDAI’s approval was not obtained because in its view the Listed Companies Guidelines only required an acquirer, and not the transferor, of 5% or more of the paid-up equity share capital of a listed insurance company to take prior approval of the insurance regulator. Based on the submissions made by BNP and SBI Life, the IRDAI passed an order dated December 23, 2019[1], wherein it held BNP liable for breach of Section 6A(4)(b)(iii) of the Insurance Act, the Transfer Regulations and the Listed Companies Guidelines for not taking prior approval of the IRDAI for the transaction in question. The IRDAI also held that in this case, it was BNP’s sole responsibility to take IRDAI’s approval for the transaction.
While the matter stands settled on the approval requirements applicable to a transfer of 5% or more of the paid-up share capital of an insurance company, the Listed Companies Guidelines did not expressly clarify on the process for taking prior approval for a share transfer in excess of 5% of the paid-up equity share capital of a listed insurance company, especially when the acquirer was acquiring shares from the open market where there could be multiple sellers selling shares. This gap has now been filled by the Circular, which has clarified as follows:
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Acquisition of more than 5% of the paid-up equity share capital of a listed insurance company shall require the prior approval of the IRDAI. The application for seeking approval of the IRDAI should be filed through the concerned insurance company;
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For transfer of more than 5% of the paid-up equity share capital of a listed insurance company by a transferor (cumulative with his relatives, associate enterprises and persons acting in concert), the transferor shall be required to take the prior approval of the IRDAI. The application for seeking prior approval should be filed through the insurance company; and
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In case of a transfer of more than 1% and up to 5% of the paid-up equity share capital of a listed insurance company, the transferor shall immediately upon execution of the transaction inform the insurance company.
It is pertinent to mention that the IRDAI has not expressly clarified on the forms that would need to be filed for approvals for the above-mentioned transfers. However, the IRDAI’s conjoint reading of the Listed Companies Guidelines and the Transfer Regulations, as evidenced by Clause 16 of the Listed Companies Guidelines and the order passed in BNP’s case, signifies that the application for approval for transactions in the shares of listed insurance companies would need to be filed in Form A and Form B prescribed by the Transfer Regulations. In case of the acquirer acquiring 5% or more of the paid-up equity share capital of a listed insurance company, the application would also need to be supported by a duly filled Form A prescribed by the Listed Companies Guidelines.
The Circular further clarifies that the thresholds for deemed approval as specified in Clause 4 of the Listed Companies Guidelines will be considered after taking into account the existing shareholding of the acquirer. The acquirer will not be required to take prior approval of the IRDAI for an acquisition of shares in a listed insurance company if the acquirer’s aggregate holding in the listed insurance company is less than 5% of the paid-up equity share capital of the listed insurance company upon completion of the acquisition. In all such cases, a “fit and proper” self-certification shall be treated as a deemed approval under Section 6A(4)(b)(iii) of the Act and no separate approval of the IRDAI will be required.
B. Clarifications in relation to transfer of shares of unlisted and listed insurance companies completed by way of multiple transactions
In providing for the requirement to take IRDAI approval, neither Section 6A nor the Transfer Regulations have expressly clarified on the treatment of share transfers completed by way of multiple transactions. 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 Clause 5 of the Listed Companies Guidelines, seem to suggest that an acquirer would always require an IRDAI approval for any incremental share acquisition after acquiring 5% of the paid-up equity shares[2]. The IRDAI has now clarified by way of the Circular that:
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In the event an acquirer proposes to execute multiple transactions for acquiring shares of an unlisted insurance company, a prior approval of the IRDAI pursuant to Section 6A(4)(b)(ii) of the Insurance Act will be needed if the acquirer cumulatively acquires 5% or more of the paid up equity share capital of the insurance company in a financial year. Requirement to take IRDAI approval will be triggered when the threshold of 5% as specified in Section 6A(4)(b)(ii) of the Insurance Act is breached.
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In the event a transferor proposes to execute multiple transactions for selling shares of an unlisted insurance company, a prior approval of the IRDAI pursuant to Section 6A(4)(b)(iii) of the Insurance Act will be needed if the transferor cumulatively transfers 1% or more of the paid-up equity share capital of the insurance company in a financial year. Requirement to take IRDAI approval will be triggered when the threshold of 1% as specified in Section 6A(4)(b)(iii) of the Insurance Act is breached.
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In so far as listed insurance companies are concerned, the abovementioned conditions will only apply to share transfers by promoters/ promoter group entities. However, for determining whether the transfer of shares of a listed insurance company completed through multiple transactions in a financial year require the IRDAI’s prior approval, the IRDAI will also take into account any ‘Offer for Sale’ as per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 by the existing shareholders, whether such shareholder is part of the promoter/promoter group or not.
C. Consequences of non-compliance with Circular
In order to supervise compliance with the Circular, the IRDAI has by way of Clause E of the Circular stipulated an obligation on insurance companies to immediately inform the IRDAI if any non-compliance is observed with regard to the provisions of the Insurance Act, the regulations and guidelines framed thereunder and the circulars issued regarding the transfer of shares by the Authority.
Further, to grant teeth to the requirement of taking IRDAI’s approval for transactions which require such approval, the Circular states that transactions executed beyond the stipulated threshold limits by shareholders without the prior approval of the IRDAI will disentitle the transferee of from exercising any voting rights in any of the meetings of the insurance company. Further, the transferee of such shares shall also be required to promptly dispose of the excess shares acquired, beyond the specified threshold for seeking IRDAI’s approval. The non-compliance with the approval requirements shall also attract regulatory action by the IRDAI.
The penal provisions specified in the Circular in effect make the transferee responsible for ensuring that requisite approvals are obtained from the IRDAI for acquiring shares when such shares are being purchased from multiple sellers. However, one wonders how a retail investor trading on a stock exchange will undertake such compliances when a defaulting shareholder offloads shares on the market.
For further information, please contact:
Indranath Bishnu, Partner, Cyril Amarchand Mangaldas
indranath.bishnu@cyrilshroff.com
[1] Order in the matter of Transfer of 5,07,40,000 equity shares of SBI Life Insurance Company Limited by BNP Paribas Cardif S.A., Order dated December 24, 2019 bearing reference no. IRDAI/F&A/ORD/TRSH/235/12/2019
[2] Section 6A(4)(b)(ii) of the Insurance Act states as follows:
“(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–
(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”
Regulation 3(a) of the Transfer Regulations state as follows:
“No registration of transfer of shares or issue of equity capital of an insurance company
(a) which would result in change in the shareholding shall be made, where,
transfer, the total paid up holding of the transferee in the shares of the insurance company is likely to exceed five percent of its paid up capital; …”
