Insurance Regulatory and Development Authority

Ref. No: IRDA/F&A/2020-21/ED/437

Date:05-11-2020

Exposure draft of

IRDAI (Manner of Determination of Compensation to Shareholders on Merger of an Insurer under a Scheme Prepared under Section 37A) Regulations, 2020

Section 37A (4A) of the Insurance Act, 1938 reads as under:

“(4A) Every policyholder or shareholder or member of each of the insurers, before amalgamation, shall have the same interest in, or rights against the insurer resulting from amalgamation as he had in the com-pany of which he was originally a policyholder or shareholder or member:

Provided that where the interests or rights of any shareholder or member are less than his interest in, or rights against, the original insurer, he shall be entitled to compensation, which shall be assessed by the Au-thority in such manner as may be specified by the regulations.”

In accordance with the proviso of the said section, the shareholders and members whose rights have been adversely impacted by the scheme of amalgamation /merger framed under Section 37A shall be entitled to compensation. For the purpose of determination of such compensation, the Authority needs to frame the Regulations.

Accordingly, draft regulations have been prepared. A brief summary of the draft regulations is as under:

1. It provides for compensation to the shareholders whose rights against the acquiring insurer has been reduced. Such compensation shall be paid based on the residual value of the assets.

2. The residual value of the assets shall be the amount equal to the value of the assets of the acquired insurer as on the day immediately before the appointed day, less the total amount of liabilities.

3. The compensation shall be paid either in cash and/or in kind or partially in cash and partially in kind.

4. It provides for separate provisions for payment of compensation for merger/ amalgamation of the branch of a foreign reinsurer.

5. Every shareholder of the acquired insurer shall be given such amount as compensation, as bears to the residual value of the assets, the same proportion as the amount of paid-up capital of the shares held by the shareholder bears to the total-up capital of the acquired insurer.

Where equity shares of one or more shareholders are not fully paid-up, the unpaid portion on such equity shares shall be deducted from the compensation payable.

Further, where the preference shares of acquired insurer have not been taken over by the acquiring insur-er, such preference shareholders shall get preference over equity shareholders.

6. Where the amount of compensation offered in terms of these regulations is not acceptable to hold-ers of not less than 10 percent of the paid up equity capital of the acquired insurer to whom the compensa-tion is payable, such aggrieved persons may prefer an appeal to the Securities Appellate Tribunal before such date as may be notified by the Authority.

The time period for appeal may be specified by the Authority which shall not be less than 30 days from the date of intimation of compensation.

The draft of the IRDAI (Manner of Determination of Compensation to Shareholders on Merger of an Insur-er under a Scheme Prepared under Section 37A) Regulations, 2020 is at Annexure-A.

The comments/suggestions on the draft Regulations may be forwarded to Mr. Sumit Arora, Assistant Manager at sumit.arora@irdai.gov.in with a copy to Mrs. R Uma Maheswari, Deputy General Manager at uma@irdai.gov.in by 20th November, 2020 in the format [Annexure-1] attached herewith.

R K Sharma
General Manager

ANNEXURE 1 

FORMAT FOR SUGGESTIONS ON

Draft IRDAI (Manner of Determination of Compensation to Shareholders on Merger of an Insurer under a Scheme Prepared under Section 37A) Regulations, 2020

Change suggested by
Date  
Note ♦ It is suggested that ONE Page may be used for one change.

♦ This will enable us to group all the suggestions and take a decision on the changes suggested

Page No Regulations /Annexure Regulation and Sub-Regulation No./Para Number Comments/ Suggestions Reasons
       

Annexure-A 

Insurance Regulatory and Development Authority of India (Manner of Determination of Compensation to Shareholders on Merger of an Insurer under a Scheme Prepared under Section 37A) Regulations, 2020

Objective: To provide for the manner of determination of compensation for the shareholders whose interests in, or rights against, the insurer resulting from amalgamation are less than his interest in, or rights against the original insurer.  

F. No. IRDAI/Reg/20/132/2016 – In exercise of the powers conferred by Section 37A (4A) read with Section 114A of the Insurance Act, 1938 (4 of 1938) and sections 14 and 26 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999), the Authority in consultation with the Insurance Advisory Committee, hereby makes the following regulations, namely; 

1. Short title and commencement

(1) These regulations may be called the Insurance Regulatory and Development Authority of India (Manner of Determination of Compensation to Shareholders on Merger of an Insurer under a Scheme Prepared under Section 37A) Regulations, 2020

(2) These Regulations shall come into force on the date of their publication in the Official Gazette.

2. (1) Definitions. –In these regulations, unless the context otherwise requires, –

(i) “Act” means the Insurance Act, 1938 (4 of 1938).

(ii) “Assets” includes all assets including the properties of the acquired or original insurer which shall, in terms of the Scheme, be taken over by the acquiring Insurer;

(iii) “Authority” means the Insurance Regulatory and Development Authority of India established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999).

(iv) “Acquiring Insurer” means the insurer resulting from the amalgamation of the original or acquired insurer in accordance with the scheme of amalgamation.

(v) “Acquired or original Insurer” means the insurer whose business under the Scheme of amalgamation shall be merged with the Acquiring Insurer.

(vi) “Appointed Date”: means the date notified by Central Government on which the provisions of Scheme shall come into force.

Provided that different dates may be specified for different provisions of the scheme.

(vii) “Compensation” means the amount determined in accordance with these regulations and payable either in cash or in kind to the shareholders whose interests in, or rights against, the insurer resulting from amalgamation are less than his interest in, or rights against the original insurer.

(viii) “Liabilities” includes the liabilities including contingent liabilities, if any, of the acquired insurer which shall, in terms of the Scheme, be taken over by the acquiring Insurer.

(ix) “Preference Share capital” means the preference share capital as defined in Section 43 (b) of the Companies Act, 2013 and satisfying the criteria laid down in Insurance Regulatory and Development Authority of India (Other Forms of Capital) Regulations, 2016.

(x) “Residual Value of Assets” means the amount equal to the value of the assets of the acquired insurer as on the day immediately before the appointed day, less the total amount of liabilities thereof computed in accordance with the provisions of the Chapter V.

(xi) “Scheme of amalgamation” means a scheme prepared by the Authority and sanctioned by the Central Government under the provisions of Section 37A of the Insurance Act, 1938.

(xii) “Shareholders and members” mean the shareholders and members of the acquired company immediately before the appointed date or such other date as may be specified under the Scheme of amalgamation.

All words and expressions used herein and not defined in these regulations but defined in the Insurance Act, 1938 (4 of 1938), or in the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999) or regulations made therein shall have the same meanings respectively assigned to them in those Acts and Regulations.

Chapter II

General Provisions

3. Where the Authority is satisfied that it is necessary that

(i) in the public interest; or

(ii) in the interests of the policyholders; or

(iii) in order to secure the proper management of an insurer; or

(iv) in the interests of the insurance business of the country as a whole;

an insurer cannot be permitted to continue operations; it may prepare a scheme for the amalgamation or merger of that insurer with any other insurer (hereafter referred to in these regulations as acquiring insurer).

Provided that the scheme shall be prepared as per the provisions of Section 37A of the Act, and may contain any or all matters as detailed in sub-section (2) of section 37A.

4. Every person who, immediately before the appointed day, is registered as a shareholder in the acquired insurer and the interest in, or right of such shareholder against the acquiring insurer are equal to the interest in, or right against the acquired insurer, such shareholders shall not be entitled for compensation under these regulations.

Chapter III

Provisions for insurance companies

5. Every person who, immediately before the appointed day, is registered as a shareholder of shares in the acquired insurer and the interest in, or right of such shareholders against the acquiring insurer are less than their interest in, or right against the acquired insurer, such class of shareholders shall be eligible for compensation in accordance with these regulations.

6. Where a shareholder is eligible for compensation in accordance with regulation 5 above, such compensation in respect of the transfer of the undertaking of the acquired insurer shall be paid by the acquiring insurer as per the provisions of these regulations.

Provided that where a company has issued Preference shares, the shareholders of such shares shall be given priority over the equity shareholders.

Provided further, the equity shareholders shall have the right to compensation only if there is residual value of the acquired insurer after meeting all policy and other defined liabilities and after meeting the claims of the preference shareholders.

7. The compensation as determined in line with the provisions of these regulations shall be paid either in cash and/or in kind or partially in cash and partially in kind.

8. The compensation shall be determined by the acquiring insurer in accordance with the principles contained in the Chapter V and shall be offered by it to all those to whom compensation is payable under Regulation 7 in full satisfaction thereof.

9. Appeal: The compensation determined in accordance with Regulation 8 shall be final and binding to all the shareholders.

Provided that where the amount of compensation offered in terms of Regulation 7 is not acceptable to holders of not less than 10 percent of the paid up  capital of the acquired insurer to whom the compensation is payable, such aggrieved person may prefer an appeal to the Securities Appellate Tribunal before such date as may be notified by the Authority.

Provided further that the time period for appeal specified by the Authority shall not be less than 30 days from the date of intimation of compensation.

Chapter IV

Provisions relating to Branch of a foreign reinsurer

10. Where the acquired insurer is a branch of an insurer incorporated outside India, the acquired insurer, shall be given by the acquiring insurer, such compensation in respect of the transfer of the undertaking of the acquired insurer as it determined in accordance with the principles contained in the Chapter V.

11. The amount of compensation shall be determined by the acquiring insurer in accordance with the principles contained in the Chapter V and shall be offered by it to the insurer under regulation 10 in full satisfaction thereof.

12. Appeal

Where the amount of compensation offered in terms of Regulation 11 is not acceptable to the insurer incorporated outside India to whom the compensation is payable, such aggrieved person may prefer an appeal to the Securities Appellate Tribunal before such date as may be notified by the Authority.

Provided that the time period for appeal specified by the Authority shall not be less than 30 days from the date of intimation of compensation.

Chapter V

Principles of Compensation

Part-1

13. The acquiring insurer shall determine the compensation payable to the shareholders of the acquired insurer whose interest in or rights against the acquiring insurer are less than their interest in or rights against the acquired insurer on basis of the following parameters:

(i) the residual value of the assets shall be the total quantum available for payment of compensation.

(ii) The acquiring insurer shall submit a certificate from a chartered account certifying that the residual value of assets has been worked out in accordance with the principles specified in this Chapter.

Provided that the total amount of compensation shall not be less than the residual value worked out on the principles specified in this Chapter.

COMPENSATION PAYABLE TO SHAREHOLDERS

14. Every shareholder of the acquired insurer to whom the compensation is payable, shall be given such amount as compensation, as bears to the total compensation, calculated in accordance with the provisions of regulation 16 (i), the same proportion as the amount of paid-up capital of the shares held by the shareholder bears to the total paid up capital of the acquired insurer.

Provided that where equity shares of one or more shareholders are not fully paid-up, the unpaid portion on such equity shares shall be deducted from the compensation payable.

Provided further that where preference shares of acquired insurer have not been taken over by the acquiring insurer, such preference shareholders shall get preference over equity shareholders.

Part II-Assets

For the purposes of this Part “assets” means the total of the following: –

1) the amount of cash in hand and the amount of balances with any bank immediately before the appointed day, whether on deposit or current account, and money at call and short notice, balance held outside India being converted at the market rate of exchange:

2) the market value, as on the day immediately before the appointed day, of any securities, shares debentures, bonds and other investments, held by the acquired insurer concerned.

Explanation. -For the purposes of this clause, –

(i) where the market value of any security, share, debenture, bond or other investment is not considered reasonable by reason of its having been affected by abnormal factors, the investment may be valued on the basis of its average market value over any reasonable period;

(ii) where the market value of any security, share, debenture, bond or other investment is not ascertainable, only such value, if any, shall be taken into account as is considered reasonable having regard to the financial position of the issuing concern, the dividend paid by it during the preceding five years and other relevant factors;

3) the amount of advances (including loans), other debts, whether secured or unsecured, to the extent to which they are reasonably considered recoverable,

4) the value of any land or buildings;

5) the total amount of premia paid, in respect of all leasehold properties, reduced in the case of each such premium by an amount which bears to such premium the same proportion as the expired term of the lease in respect of which such premium shall have been paid bears to the total term of the lease;

6) the written down value as per books, or the realisable value, as may be considered reasonable, of all furniture, fixture and fittings;

7) the market or realisable value, as may be appropriate, of the other assets appearing on the books of the acquired insurer,

Part III-Liabilities

8. (i) For the purpose of the Part “liabilities” means the total amount of all liabilities existing as on the appointed day, and all contingent liabilities which the acquiring insurer may reasonably be expected to be required to be out of its own resources on or after the appointed day.

(ii) where the acquired insurer is an insurer incorporated outside India, the total amount liabilities including contingent liabilities of branch in India of the acquired insurer existing as on the appointed day.

Provided that (i) policyholders liabilities in case of life insurer; and (ii) IBNR and IBNER in case of general insurer; shall be taken on the basis of the valuation determined by an independent actuary.

Chapter V

Miscellaneous

15. Power to remove difficulty: In order to remove any doubts or the difficulties that may arise in the application or interpretation of any of the provisions of these regulations, the Chairperson of the Authority may issue appropriate clarifications or guidelines as deemed necessary.

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