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The Securities Appellate Tribunal (SAT) Mumbai on Thursday set aside an order passed by the Insurance Regulatory and Development Authority of India (IRDAI) which held that prior approval of the regulatory authority was required before creation or invocation of a pledge on shares of an insurance company.
The order was passed by a three-member Bench presided by Justice Tarun Agarwala in an appeal instituted by Nippon India MF (Nippon) and Credit Suisse (CS).
In March 2018, Reliance Home Finance Limited (RHFL) had issued Non-Convertible Debentures (NCDs) to raise Rs. 400 crore, and the bonds were subscribed by Nippon and CS.
The bonds matured in June 2019, but RHFL was unable to redeem the NCDs. Due to the same, the company had sought to restructure the terms of the NCDs and extend the maturity date to October 31, 2019.
Further, it brought in additional security in the form of an irrevocable and unconditional corporate guarantee by Reliance Capital, which is the promoter of RHFL.
Moreover, a put option right was given to the NCD holders, namely, that upon exercising the put option, Reliance Capital was required to purchase the NCDs. A pledge was also to be given by Reliance Capital over its entire shareholding in Reliance General Insurance Company (RGIC), in favour of IDBI Trusteeship Services Ltd, which was acting as the debenture trustee for Nippon India.
Subsequently, a guarantee deed was executed, by which 25,15,49,920 shares of RGIC held by Reliance Capital was pledged in favour of IDBI Trusteeship.
Before the NCDs matured on October 31, 2019, Nippon exercised its put option” to sell 6369 NCDs for approximately Rs. 331 crore. However, Reliance Capital failed to purchase the NCDs of RHFL. Nippon then wrote to IDBI Trusteeship to invoke the pledge under the pledge agreement on October 17, 2019.
IDBI then issued a notice to Reliance Capital on October 18, 2019 and, on October 24, 2019, invoked the pledge of 25,15,49,920 shares of RGIC. Nippon informed the IRDAI of the invocation of shares.
In an order dated December 4 last year, IRDAI declared that pursuant to Section 6A(b)(ii) of the Insurance Act, 1938 read with Regulation 3 of IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations 2015, the transfer was ‘null and void’, as no approval was sought from IRDAI before invoking the pledge.
Under insurance laws, on any acquisition of 5% of an insurance company, IRDAI approval is required. Therefore, IRDAI held that as Credit Suisse and Nippon India were foreign entities, they are not permitted to invest in an insurance company beyond 49%.
Aggrieved by the same, Nippon filed an appeal before SAT Mumbai.
Arguments of the parties and what SAT held
Nippon argued that invocation of a pledge does not amount to transfer and that prior approval of IRDAI is required only when the shares are transferred on sale to a suitable buyer.
It was further submitted that Nippon had informed IRDAI that the transfer of shares by IDBI was in compliance of its statutory duty as it had only taken possession of RHFL shares in the capacity of a trustee.
Credit Suisse, which had impleaded itself in the matter, further pointed out that it only an asset management company and is carrying out its business activities as per SEBI regulations.
After the Tribunal sought for clarity in IRDAI’s position on whether it required prior approval even when there is a mere pledge created on shares of an insurance company, the regulatory authority contended that it acted in the interest of policy holders as the owner of the shares was responsible for meeting capital adequacy and solvency ratio requirements of an insurance company.
The Tribunal noted that the shares of Reliance insurance held by IDBI was in its capacity as a trustee and the said shares were not transferred to IDBI.
It thus sought an undertaking from IDBI that it will ensure necessary compliances including seeking prior approval of IRDAI at the time of sale of the shares.
After taking note of the arguments of parties, the SAT finally held that the orders of IRDAI that the transfer of shares in question are null and void ab initio, were incorrect, and to that extent, set aside the order. In this regard, the SAT order reads,
"We however dispose of the appeal with the direction that the observation in the impugned orders that the transfer / pledge of the shares in question are null and void ab initio is incorrect and to that extent, the order is set aside. We also record that IDBI Trusteeship Services Ltd. Respondent No. 2 is holding the pledged shares as a custodian and will make every endevour to find a suitable buyer. As and when a suitable buyer is found suitable application would be made before IRDAI for appropriate approval to enable the IRDAI to carry out due diligence and to ascertain fulfillment of Fit and Proper criteria, financial soundness, etc."
SAT Mumbai order
Moreover, the Tribunal also made it clear that as long as IDBI is holding shares as a trustee and a custodian of shares, it cannot exercise any control over RHFL, make any changes, have a say in management or the decision making process of the company, or exercise any voting rights on RHFL shares.
Senior Advocate Pradeep Sancheti appeared for Nippon, along with Sumit Agrawal, Mahaveer Rajguru, and Akshit Jain of RegStreet Law Advisors.
Senior Advocate Shyam Mehta represented IRDAI. He was briefed by Sushant Yadav, and Shehaab Roshan of Ashar & Co.
Senior Advocate Darius Khambata appeared for IDBI Trusteeship. He was briefed by Harish Shroff & Co.
Senior Advocate Gaurav Joshi appeared for Reliance Capital and RGIC. He was briefed by a team from Zerick Dastur, Advocates & Solicitors comprising Zerick Dastur, Sneha Sheth, Khushil Shah, and Tanvi Gaitonde.
Senior Advocate Janak Dwarkadas represented the intervener Credit Suisse. He was briefed by a team from JurisCorp comprising Jayesh H Shah, Shubhabrata Chakraborti, Arikshit Moral, and Anita Irani.
[Read the order here]