This article has been written by Aditi Sahu pursuing the Diploma in Business Laws for In-House Counsels from LawSikho. This article has been edited by Zigishu Singh (Associate, Lawsikho) and Ruchika Mohapatra (Associate, Lawsikho).
India is ranked tenth in the world in terms of the size of the life insurance industry. In 2019, India’s share of the global life insurance market was 2.73 percent. The life insurance premium in India increased by 9.63% over the previous year, while the global life insurance premium increased by 1.18%.
India is ranked 15th in the world for the non-life insurance industry. During 2019, India’s share of the global non-life insurance market was 0.79 percent. Non-life insurance premiums in India increased by 7.98% over the previous year, while global non-life insurance premiums increased by 3.35%. During 2019, the global share of life insurance business in total premium was 46.34 percent, while the share of non-life insurance premium was 53.66 percent. However, India’s share of life insurance business was high at 74.94 percent, while the non-life insurance business was at 25.06 percent.
To regulate and monitor all these activities, there is a statutory body in India which is known as the Insurance Regulatory and Development Authority of India (IRDAI). They regulate the Indian insurance industry to protect policyholders’ interests and promote the industry’s orderly growth. This article emphasizes the role and guidelines made by the IRDAI for the transfer of shares of listed companies.
What is IRDAI?
The Insurance Regulatory and Development Authority of India (IRDAI) is a statutory body established by an Act of Parliament, namely the Insurance Regulatory and Development Authority Act, 1999 (IRDAI Act 1999), to oversee and develop the Indian insurance sector. The IRDAI is an autonomous and statutory agency that manages and regulates India’s insurance and reinsurance industries. The organization consists of ten members, including a chairman, five full-time members, and four part-time members. It was established in 1999 by an Act of Parliament, and its headquarters are in Hyderabad.
History : the Insurance Industry in India
The Government of India nationalized India’s insurance industry in 1950 and established the Life Insurance Corporation of India (LIC of India). The government decided to open up the insurance sector to private players in the 1990s. The Irdai was formed after a committee was formed to propose reforms.
When the market was opened up in 2000, foreign firms were allowed to buy up to a 26% stake in Indian insurance companies. Foreign direct investment in the insurance sector was later limited to 49%. In Budget 2020, this was finally changed to 100%.
Duties and functions of IRDAI
Section 14 of the IRDAI Act of 1999 establishes IRDAI’s duties, powers, and functions.
· Issue a certificate of registration to the applicant, renew, change, withdraw, suspend, or cancel the registration;
· Protection of policyholders’ interests in areas relating to policy assignment, nomination by policyholders, insurable interest, payment of insurance claims, policy surrender value, and other terms and conditions of insurance contracts;
· Establishing minimum requirements, a code of behavior, and hands-on training for insurance intermediaries and agents
· Defining the surveyors’ and loss assessors’ code of conduct;
· Improving efficiency in the insurance industry’s operations;
· Promoting and regulating professional organizations associated with the insurance and reinsurance industries
· Imposing fees and other charges to carry out the purposes of this act;
· Inquiring about, inspecting, and conducting inquiries and investigations, including audits, of insurers, intermediaries, insurance intermediaries, and other organizations involved in the insurance business;
· Control and regulation of insurers’ rates, benefits, terms, and conditions in respect of general insurance business not controlled and regulated by the tariff advisory committee under Section 64U of the insurance act of 1938 (4 of 1938);
· Specifying the form and manner in which insurers and other insurance intermediaries shall keep books of account and render statements of accounts;
· Regulating insurance companies’ investment of funds;
· Regulating the maintenance of the solvency margin;
· Resolving disputes between insurers and intermediaries or insurance intermediaries
· Supervising the tariff advisory committee’s operations;
· Specifying the percentage of the insurer’s premium income to be used to fund the schemes for promoting and regulating professional organizations mentioned in clause (f);
· Specifying the percentage of life insurance and general insurance business that the insurer will conduct in the rural or social sector; and
· Exercising any additional powers that may be prescribed.
IRDAI formed a mission statement for itself, which is as follows:
- To safeguard policyholders’ interests and ensure fair treatment;
- To promote the rapid and orderly growth of the insurance industry (including annuity and superannuation payments) for the benefit of the common man, as well as to provide long-term funds to accelerate economic growth;
- The setting, promoting, monitoring, and enforcing high standards of integrity, financial soundness, fair dealing, and competence among those it regulates;
- To ensure that genuine claims are settled quickly, to prevent insurance fraud and other malpractices, and to put in place effective grievance redressal mechanisms.
Guidelines issued by the authorities for the transfer of shares
On July 23, 2020, the Insurance Regulatory and Development Authority of India (IRDAI) issued a circular for the transfer of insurance company shares. The authority decided to issue the following guidelines to provide more clarity on certain issues concerning the transfer of shares.
i. Transfer of Shares in Listed Insurers Requires Notification and Approval
According to the current share transfer guidelines governing listed insurers, any transfer of shares amounting to more than 1% but less than 5% of a listed insurer’s paid-up share capital requires the acquirer to submit a “fit and proper” declaration to the relevant listed insurer. Under the Insurance Act, this self-certification is deemed to be IRDAI approval for the transfer.
In addition, if a transaction results in the buyer’s aggregate shareholding (including persons acting in concert) in the listed insurance business exceeding 5%, the guidelines require the buyer to acquire prior clearance from the IRDAI. In circumstances where more than 5% of the shares of the listed insurer are being transferred, the circular now requires the transferor to receive prior clearance from the regulator. Furthermore, even in circumstances where there are numerous purchasers, the seller must obtain this clearance regardless of whether any of the acquirers’ shareholdings after the transaction surpasses 5%.
ii. Determining Transfer Thresholds Over Time
According to the circular, all transactions completed within a financial year must be considered when determining whether IRDAI or the insurer must be notified or whether prior approval from the regulator is required. While this obligation applies to all shareholders of unlisted insurers, it is only relevant to promoters and promoter groups of listed insurers. Given the possibility of numerous buy-sell on-market transactions in such a scenario, it will be interesting to see if this fiscal year threshold is applied as a net of all buy-sell transactions undertaken by the promoter groups per fiscal year, or if only sales undertaken by the promoter group are aggregated.
iii. Determination of transfer extent – Listed and unlisted insurance companies
To calculate the quantum of transfer/acquisition of shares, scenarios where a transfer is executed in favor of one or more parties, whether in a single or multiple transactions aggregating to more than 1% or 5%, will be considered. As a result, whenever the specified limits are likely to be exceeded in a fiscal year, the entity must seek prior approval from the IRDAI.
Listed Company (Companies that are publicly traded): Only the promoters/promoter group will be subject to the existing provisions. Furthermore, the transfer includes an offer for sale made by existing shareholders under SEBI (ICDR) Regulations, whether or not such a shareholder is a member of the promoter/promoter group.
iv. Shares Pledge
The provisions of Section 6A(4)(b) of the Insurance Act, 1938, and the IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations, 2015, relating to the transfer of shares, shall apply mutatis mutandis to the creation of a pledge or any other kind of encumbrance over shares of an insurance company by its promoters.
According to the circular, promoters will now need IRDAI approval before pledging their shares or creating any type of encumbrance. As a result, the promoters of insurers whose shares are currently pledged may have to seek IRDAI approval post-facto. It’s worth noting that this approval requirement applies only when a promoter creates a pledge or encumbrance, and it hasn’t been extended to other shareholders. Currently, regulations prohibit private equity investors from encumbering their shares in unlisted insurers.
v. Suspended Voting Rights
If any non-compliance with the provisions of the Insurance Act, the regulations, and guidelines as enshrined in the existing circulars issued by the IRDAI regarding the transfer of shares is observed, insurance companies must immediately notify the IRDAI, furthermore, where transactions are executed by shareholders beyond the stipulated threshold limits without the prior approval of the IRDAI,
- the transferee shall not have any voting rights in any of the insurance company’s meetings; -the transferee will promptly dispose of the excess shares acquired, beyond the specified threshold limits.
- Any transfer of shares that exceeds the specified threshold limits without prior approval from the IRDAI will result in appropriate regulatory action, according to the IRDAI.
As per aforesaid guidelines, the insurance regulator IRDAI has provided specific recommendations to provide additional clarity on various problems relating to promoters/shareholders’ transfer of re/insurance company shares. Insurance companies must immediately notify the IRDAI if there is any non-compliance with the provisions of the Insurance Act, the regulations, and guidelines as enshrined in the existing circulars issued by the IRDAI regarding the transfer of shares is observed. It also observed the matter where transactions are executed by shareholders beyond the stipulated threshold limits without the prior approval of the IRDAI.
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