[ By Bobby Anthony ]The Securities Appellate Tribunal (SAT) Mumbai has set aside an order passed by the Insurance Regulatory and Development Authority of India (IRDAI).The IRDAI order held that its prior approval was required before creation or invocation of a pledge on shares of an insurance company.The SAT order was passed after an appeal instituted by Nippon India MF (Nippon) and Credit...
The Securities Appellate Tribunal (SAT) Mumbai has set aside an order passed by the Insurance Regulatory and Development Authority of India (IRDAI).
The IRDAI order held that its prior approval was required before creation or invocation of a pledge on shares of an insurance company.
The SAT order was passed after an appeal instituted by Nippon India MF (Nippon) and Credit Suisse (CS).
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 in March 2018. After the bonds matured in June 2019, RHFL was unable to redeem the NCDs. So, the company sought to restructure the terms of the NCDs and extend their maturity date to October 31, 2019.
It also 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 NCD holders, 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 favor of IDBI Trusteeship Services Ltd, which acted 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 favor of IDBI Trusteeship. Nippon exercised its put option to sell 6369 NCDs for approximately Rs 331 crore before they matured on October 31, 2019.
After Reliance Capital failed to purchase the NCDs of RHFL, Nippon wrote to the 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, 2019, 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.
As per insurance laws, IRDAI approval is required for any acquisition of 5% of any insurance company. Therefore, IRDAI held that since Credit Suisse and Nippon India were foreign entities, they are not permitted to invest in an insurance company beyond 49%.
After the IRDAI order, Nippon filed an appeal before the Mumbai bench of the SAT, which held that IRDAI’s orders that transfer of shares in question were null and void ab initio, were incorrect, and set aside the order.