SAT Partially Sets Aside Insurance Regulator’s Order On Pledged Shares Of Reliance General Insurance       

The Securities Appellate Tribunal has partially set aside an order by the insurance regulator which had held that the invocation of pledge on shares of Reliance General Insurance Company Ltd. by IDBI Trusteeship without its approval was void and did not have any effect.

That comes after the Insurance Regulatory and Development Authority of India had said that the invocation of pledge amounted to a transfer of shares under the Insurance Act and hence required its prior approval.

IDBI Trusteeship had assured the insurance regulator that the shares were held purely in capacity of a trustee. It had said it would seek the regulator’s approval before any actual transfer of shares was effected.

The appellate tribunal set aside the insurance regulator’s order after noting that the insurance regulator voluntarily diluted its notice after the assurance. The tribunal, however, did not opine on the question whether invocation of pledge amounts to transfer of shares under the Insurance Act.

The appellate tribunal has also directed IDBI Trusteeship against exercising any control or voting rights over Reliance General Insurance with regards to the pledged shares.

Facts Of The Case

Nippon Life India Asset Management Ltd. had subscribed to 8,000 non-convertible debentures issued by Reliance Home Finance Ltd., which were set to mature in June last year. Reliance Home Finance failed to redeem the debentures and requested their restructuring, in order to extend their maturity to Oct. 31. IDBI Trusteeship acted as a debenture trustee of the debentures held by Nippon.

As a part of the restructuring scheme, Reliance Capital Ltd., the promoter of Reliance Home Finance, issued an unconditional guarantee as an additional security in favour of the mutual fund. It also pledged 25.15 crore shares of Reliance General Insurance Company in favour of IDBI Trusteeship.

On Oct. 11, Nippon had issued a notice to exercise its put option which mandated Reliance Capital to purchase back all the non-convertible debentures held by the mutual fund. Reliance Capital, however, failed to purchase the debentures. In order to secure its investment, Nippon exercised the guarantee and asked the debenture trustee to invoke the pledge on the shares of Reliance General Insurance.

The IRDAI, on Dec. 4, passed an order stating that the transfer of shares in an insurance company without seeking its approval was in violation of the Insurance Act, 1938. It alleged that the invocation was void and would have no effect. In its defence, IDBI Trusteeship had contended that the invocation of pledge was in accordance with law and did not result in any transfer of shares. It further said that it was scouting for suitable buyers for the pledged shares and would approach the insurance regulator for an approval before any actual transfer was made.