Dispute about pledging Reliance General Insurance shares

An ongoing tussle between the Insurance Regulatory and Development Authority of India (IRDAI), Nippon India Mutual Fund and Credit Suisse is likely to head to the Securities Appellate Tribunal (SAT) after the insurance watchdog declared that the pledging of shares of Reliance General Insurance with the two entities was in violation of the law.

According to persons familiar with the development, the two entities intend to contest the IRDAI directive as they believe that the pledge was created to safeguard the interests of their investors and unit holders without an intent of owning the shares of the insurance company.

Reliance Home defaults

“The pledge was invoked after a default by Reliance Home Finance and was done purely based on the fiduciary responsibilities and the share pledge agreement,” said a person familiar with the matter.

“The IRDAI directive has created a scenario wherein the issuer has already defaulted and the bond holders no more have access to the collateral that was placed while restructuring the payment terms,” he added on the condition of anonymity.

The matter goes back to March 2018 when Reliance Home Finance issued non-convertible debentures to raise about ₹400 crore. The bonds were subscribed by Nippon India MF and Credit Suisse.

Thereafter, the bonds matured in June 2019 but Reliance Home Finance was unable to meet the payment obligations and hence sought restructuring of the terms wherein the maturity date was extended to October 31, 2019 and additional security was brought in by Reliance Capital,the promoter of Reliance Home Finance.

For the additional collateral, Reliance Capital pledged its 100% shareholding in Reliance General Insurance Company.

The company, however, again defaulted on its payment obligations and both, Nippon India MF and Credit Suisse invoked the pledge as per the deed of guarantee dated July 19, 2019 and the amended and restated share pledge agreement dated June 26, 2019.

IDBI Trusteeship, which was acting as the debenture trustee, took possession of the shares of Reliance General Insurance from the depository account of Reliance Capital.

This pledge or the transfer of shares, as per IRDAI, is a violation of Section 6(4)(b)(iii) of the Insurance Act 1938 along with Regulation 3 of IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations 2015.

In its letter dated December 27, IRDAI declared the pledge as “null and void ab initio” while also stating that Section 2(7A) of the Insurance Act caps the foreign holding limit in an insurance company.

While both, Credit Suisse and Nippon India MF are foreign entities, the foreign holding for an insurance company is capped at 49%. While a spokesperson for Credit Suisse declined to comment, an e-mail query sent to Nippon India Mutual Fund remained unanswered till the time of going to press.

“Transfer of shares is sacrosanct in depository system, and SAT, that hears appeals against orders issued by SEBI and IRDAI, has consistently taken a position that reversal of a transfer or invocation of pledge should not be allowed to maintain the sanctity of the market,” said a securities market lawyer wishing not to be named.

Interestingly, in a release issued on December 29, Reliance Capital said that the IRDAI decision has “protected the interest of all lenders and debenture holders” of the company and will help in monetising its stake in the insurance company to reduce its overall debt.