Insurance regulator IRDA today made it mandatory for insurers to seek prior approval in case of stake transfer to domestic entities or financial institutions and set guidelines for seeking approval. As per a IRDA circular, the regulator will carry out the requisite due diligence of the proposed transferee or shareholder prior to grant of approval for registration of transfer of shares under the provisions of section 6A(4) of the Insurance Act, 1938 and for issue of shares to the proposed transferee or shareholder.

The circular assume significance in the light of Bharti-AXA Reliance Industries deal and Punjab National Bank proposing to pick up 30% stake in the Metlife India.

The regulator would also examine various issues including the minimum lock-in period of the proposed stake stake holder before granting approval.

Besides, the IRDA will also look into additional capital in proportion of its shareholding at periodic intervals to ensure that the insurance company is compliant with the regulatory solvency requirements.

“No registration of transfer of shares of the insurer as specified under the provisions of Section 6A(4) of the Insurance Act, 1938 and issue of capital which would result in change in the shareholding pattern of the insurance company, as indicated at clause A, shall be made except with the previous written approval of the Authority,” the IRDA circular said.

Circular is as follows:-

————————-

To CEOs of Life, Non-Life insurers (including Re-insurer)

 

Ref:517/1/F&A/RTS/90/Aug./2011-12                                              Date:12-08-2011

 

Approval for Registration of Transfer of Shares under Section 6A of the Insurance Act, 1938

The Authority had vide email dated 26th July, 2011 issued the Exposure Draft of the Circular formalising the process of regulatory approval under the provisions of Section 6A of the Insurance Act, 1938.

 

We have since received comments/recommendations on the Exposure Draft from the following:-

·         Life Insurance Council

·         Bajaj Allianz Life Insurance Co.Ltd.

·         Royal Sundaram General Insurance Co. Ltd.

·         Apollo Munich Health Insurance Co. Ltd.

·         HDFC Ergo General Insurance Co. Ltd.

·         ICICI Lombard General Insurance Co. Ltd.

·         CholamandalamMS General Insurance Co. Ltd.

·         SBI General Insurance Co. Ltd.

·         Max Bupa Health Insurance Co. Ltd.

 

The Authority has examined the comments/ recommendations on the draft Circular, and has incorporated the same where considered necessary. As regards the remaining suggestions received, the rationale for not incorporating the same in the final version of the Circular being issued by the Authority are broadly indicated below:-

Sl.No.
Comments received
IRDA’s view
1
Timeframe for grant of approval should be indicated
The Authority would process the application expeditiously. However, the final approval is linked to the submission of requisite information by the applicant.
2
Exclude renunciation from the purview of the circular
Any renunciation which results in a change in share capital structure in excess of 1% requires the prior approval under the provisions of the Act.
3
ESOPs be kept out of the purview of the circular
Any holding in excess of 1% requires the prior written approval of the Authority. No exemptions can be given from the provisions of the Act.
4
Criteria for ‘fit and proper’ due diligence be left to the respective Board
The Circular covers significant changes in the capital structure of the insurance companies. In which case, a thorough due diligence would have to be carried out by the Authority. This position would be reviewed if it is observed to be too cumbersome.
5
Difficulty in monitoring the limits and the process may become onerous
Caps exist as to exposure by various entities in the banking sector as well. There are well established mechanisms in place to ensure that these limits are not breached.
Based on the experience gained, IRDA could review the process.
6
Inter-se transfer amongst the existing promoters/ members subject to FDI regulations should be permitted without necessary approvals
Any change in shareholding structure in excess of 1% requires the approval of the Authority and is equally applicable to Indian and foreign shareholders.   This proviso is also applicable to intra-group transfers.
7
Whether any issue of capital which ensures that the shareholding pattern of the company does not undergo a change, requires the approval of the Authority.
No approvals are required in this regard.
8
Prior approval should be required only where there is a change in the shareholding of the promoter and where there is an acquisition of substantial stake (say 25%) or where there is allotment of shares which results in change in control.
Section 6A of the Act requires prior approval of the Authority in such cases where the transaction results in breach of the specified limits. The provisions of the Act cannot be relaxed.
9
The onus of seeking prior approval be shifted to transferor/ transferee
The Act prohibits the registration of transaction except with the previous approval of the Authority.  The registration is done by the company and consequently, the burden of obtaining the approvals must only be on the company.
10
The pre-conditions relating to minimum lock-in period, minimum capital calls limits, regulatory compliance etc., should be applicable to the substantial shareholders.
The Circular only reserves the right to impose such limitations and conditions which deem necessary by the IRDA.  Obviously the IRDA would be exercising such powers judiciously.
The Circular No.IRDA/F&A/CIR/DRSH/183/08/2011 dated 11th August, 2011 laying down the procedure for seeking approval of the Authority for registration of transfer of shares under section 6A of the Insurance Act, 1938 is attached as pdf.
The Circular comes into effect from the date of issue.
 
Sd/-
(J. Hari Narayan)
Chairman

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