IRDAI Ups Its Game On Insurers’ Share TransfersBloombergQuintOpinion
Taking a break from addressing regulatory changes in wake of the ongoing pandemic, the Insurance Regulatory and Development Authority of India in July issued a circular to address some long-standing issues regarding transactions involving the shareholding of insurance companies.
The circular deals with four critical aspects:
- Intimation and approval requirement for transfer of shares of listed insurers;
- Time period for determining transfer thresholds;
- Pledge of shares of an insurance company; and
- Suspension of voting rights.
Let us examine these changes a little closely.
1. Intimation and Approval Requirement for Transfer of Shares of Listed Insurers
Currently, as per the guidelines on share transfers governing listed insurers, in case of any transfer of shares amounting to more than 1% but less than 5% of the paid-up share capital of a listed insurer, the acquirer must submit a ‘fit and proper’ declaration to the relevant listed insurer. This self-certification is deemed to be an approval of IRDAI for the transfer, under the Insurance Act.
Now, the insurance regulator has additionally imposed a requirement on the transferor as well, to ‘immediately’ intimate the insurer on the execution of such a transaction.
The guidelines also require the buyer to obtain prior approval from the IRDAI in case a transaction leads to the buyer’s aggregate shareholding (including persons acting in concert) in the listed insurance company to exceed 5%. The circular has now imposed an obligation on the transferor as well, to obtain prior approval of the regulator in cases where over 5% of the shares of the listed insurer are being transferred. Moreover, even in cases with multiple buyers, the seller must obtain this approval irrespective of whether any of the acquirers’ shareholding exceeds 5% post the transaction.
2. Time Period For Determining Transfer Thresholds
The circular specifies that to determine whether IRDAI or the insurer must be notified or prior approval of the regulator must be sought, all transactions executed during a particular financial year will have to be considered. While this requirement is applicable to all shareholders of unlisted insurers, in the case of listed insurers it is restricted to promoters and promoter group. In such a scenario, given the possibility of numerous buy-sell on-market transactions, it will be interesting to see if this financial year threshold is applied as a net of all buy-sell transactions undertaken by the promoter groups per financial year, or if only all sales undertaken by the promoter group are aggregated.
3. Pledge Of Shares
As per the circular, promoters will now require prior approval of IRDAI before pledging their shares or creating any form of encumbrance. Accordingly, the promoters of insurers whose shareholding is currently pledged may have to seek post-facto approval of IRDAI.
It is interesting that such an approval requirement is only applicable in case of creation of pledge or encumbrance by a promoter and has not been extended to other shareholders. At present, regulations prohibit private equity investors from creating any encumbrance on their shareholding in unlisted insurers.
4. Suspension of Voting Rights
The recent circular prescribes that in case of any transfer beyond the stipulated threshold without IRDAI approval, the acquirer will not have any voting rights in relation to such shares and will be required to promptly dispose of its shareholding beyond the specified threshold.
What Motivated IRDAI To Make The Changes?
These changes and clarifications appear to be emanating from the regulator’s recent experience and learnings. For instance, the requirement for transferors of shares of listed insurers to notify or seek approval of IRDAI is a regulatory change to incorporate the recent IRDAI order in the matter of SBI Life Insurance Company Ltd., where, IRDAI had clarified that in case of transfer of over 5% shares of a listed insurer, irrespective of the obligations of the acquirer, the transferor must obtain approval.
With respect to the change pertaining to the pledge of shares, the clarification that ‘transfer’ includes within its ambit the creation of pledge or any form of encumbrance over shares of an insurer, is a direct consequence of another recent case involving the pledge of shares of an insurer. In this case, IRDAI’s initial ruling on the invocation of such pledge being null and void was subsequently overruled by the Securities Appellate Tribunal.
A few questions linger on – for instance, when it comes to intimation or approval for transactions of shares of listed insurers, it is unclear whether two separate applications would have to be made to IRDAI, vis-à-vis both the transferor and the acquirer. Logically, this could be a joint application where the insurer and the acquirer are on good terms.
Also, the circular of the IRDAI does not specify if promoters, who have already pledged shares of insurers, will have to mandatorily seek retrospective approval for such existing share pledge.
Step In The Right Direction
As mentioned above, the regulator seems to be learning from its experiences. Going forward, promoters and stakeholders in insurance companies will have to keep a closer eye on any transfer of shares. The message seems to be one of greater transparency and oversight and the IRDAI seems to have taken a cue from market regulator SEBI when it comes to tracking changes in shareholding over the period of a financial year.
While IRDAI has left a few questions unanswered, the circular definitely provides much needed clarity with respect to existing provisions on transfer of shares and reflects the regulator’s intent to address issues arising out of current market transactions. However, the procedural aspects of some of these changes introduced by IRDAI through the circular are awaited.
Anuj Shah is a Partner, Harsh Khemka is a Senior Associate and Srishti Mukherjee is an Associate at Khaitan & Co.
The views expressed here are those of the authors and do not necessarily represent the views of BloombergQuint or its editorial team.