2020 (3) TMI 573 - AT - SEBI

Violation of Section 6A(4)(b)(iii) of the Insurance Act, 1938 - transfer of shares made without previous approval of the authority and, therefore, such transfer of shares are null and void ab initio - HELD THAT - Referring to communication of IRDAI vide their letter dated February 4, 2020 and their reply filed before this Tribunal, it is apparently clear that damage control measures have been adopted by Respondent No. 1 subsequent to the impugned orders dated December 4, 2019 and December 27, 2019. The communication/order of IRDAI dated February 4, 2020 has largely diluted its own order dated December 4, 2019 and December 27, 2019. The stand of the Respondent No. 1 as depicted in paragraph No. 21 of their reply makes is apparently clear that prior to any transfer of the shares in question, the authority is required to be in a position to carry out due diligence in order to ascertain fulfillment of Fit and Proper criteria and financial soundness of the transferee. Stand of the respondent No. 1 that the use of the word transfer as depicted as per the provisions of Section 6A(4)(b)(iii) of the Insurance Act would also include any form of transfer of shares including a pledge is not being considered at this stage and is left open. 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. We also make it clear that so long as the IDBI Trusteeship Services Ltd. Respondent No. 2 is holding the shares in the capacity as a trustee/custodian, IDBI Trusteeship Services Ltd. Respondent No. 2 will not exercise any control over RGIC or make changes or have a say in the management or decision making process of RGIC or exercise any voting rights in respect of the said RGIC shares.

Summary

Issues:
1. Violation of Insurance Act and Transfer of Equity Shares Regulations by the respondent.
2. Invocation of pledge on shares and subsequent actions by the appellants.
3. Representation made by the appellants to IRDAI regarding the pledge.
4. Stand of IRDAI and subsequent communication regarding the shares held in pledge.
5. Decision of the Tribunal on the nullity of the transfer/pledge and directions given.

Issue 1: Violation of Insurance Act and Transfer of Equity Shares Regulations
The appeal was filed against IRDAI's order deeming the transfer of shares by the respondent as a violation of Section 6A(4)(b)(iii) of the Insurance Act along with Regulation 3 of the Transfer of Equity Shares Regulations. The transfer was considered null and void as it lacked prior approval from the authority, leading to the appeal challenging this decision.

Issue 2: Invocation of pledge on shares and subsequent actions
Appellant No. 1 exercised the put option to sell NCDs and requested the pledge on shares to be invoked when the NCDs were not repurchased by the respondent. IDBI Trusteeship Services Ltd. invoked the pledge and took possession of the shares, leading to the initiation of the legal proceedings and the subsequent appeal against the nullity of the transfer/pledge.

Issue 3: Representation made by the appellants to IRDAI
The appellants made a representation to IRDAI, clarifying that the shares were held in trust and that no control was intended over the company. They assured compliance with statutory duties and sought approval before any transfer of shares to a buyer, emphasizing their adherence to applicable laws and regulations.

Issue 4: Stand of IRDAI and subsequent communication
IRDAI, in response to the representation, acknowledged the shares were held in trust and advised compliance with Insurance Act provisions upon any future transfer. The subsequent communication indicated a shift in IRDAI's stance, emphasizing the need for due diligence and fulfillment of criteria before any transfer of shares.

Issue 5: Decision of the Tribunal on nullity of transfer/pledge
The Tribunal, considering the communication and subsequent developments, set aside the order declaring the transfer/pledge null and void ab initio. It directed that the shares held in pledge were to be managed by IDBI Trusteeship Services Ltd. as custodian for finding a suitable buyer. Approval from IRDAI was mandated for any transfer, ensuring due diligence and compliance with regulatory criteria, while prohibiting any control or influence over the company by the trustee.

This comprehensive analysis covers the issues surrounding the violation of regulations, invocation of pledge, representations made to IRDAI, responses from IRDAI, and the final decision of the Tribunal regarding the nullity of the transfer/pledge and the subsequent directions provided for managing the shares in question.