Nippon Life Insurance Co acquiring 26 per cent stake in Reliance Life Insurance for Rs. 3,062 crore dominated the headlines of media recently. The quantum of the offer may have surprised many, but not those conversant with the valuation of life insurance enterprises.
The offer has also revived the old question: Can a promoter divest a part of his holding within ten years from the commencement of the life insurance company?
What are the provisions in the Insurance Act in this regard?
As per sub-Sec. (1) of Sec.6AA of the Act, no promoter shall at any time hold more than 26 per cent or such other percentage, as may be prescribed, of the paid-up equity capital of an Indian insurance company provided that in a case where an Indian insurance company begins the business of life or general or Re insurance in which promoters hold more than 26 per cent of the paid-up equity capital, the promoters shall divest the stake in a phased manner in excess of 26 per cent of the paid-up equity capital after ten years from the date of commencement of the said business.
Can this be interpreted to mean that the promoters can divest their excess holdings only after ten years?
The above section can be divided into three parts.
The first part imposes a condition, namely, no promoter can hold more than 26 per cent of the paid-up equity capital. That is, an initial public offer (IPO) has to be made at inception itself to divest the balance.
The second part, beginning with the words ‘provided that', gives concession to keep in abeyance the enforcement of the above condition for some time. That is, it gives time for promoters to bring down their holdings to 26 per cent.
The third part, starting with the words ‘the promoters shall divest', indicates that the condition imposed by the first part can only be kept in abeyance for a maximum period of ten years.
The first part of Sec. 6AA shows that, even at the time of commencement, the combined holdings of promoters of an Indian insurance company can be less than 100 per cent of the paid-up equity capital. That is, an Indian insurance company can go in for an IPO even at the time of inception.
The second part shows that if the promoters do not wish to go in for an IPO at the time of inception they cannot be compelled to do so during the first ten years from the date of commencement of business. But a promoter can voluntarily divest the full or part of the 74 per cent during the first ten years, either through an IPO or through a strategic sale or through a combination of both. The third part shows that if at the end of ten years from the date of commencement of business the holdings of promoters are still in excess of 26 per cent of the paid-up equity capital, the regulator can direct them to submit a schedule for divesting the excess holdings within a reasonable timeframe
Allowing a maximum period of ten years to divest the excess holdings is only a concession. Not allowing a promoter to divest the excess holdings within ten years will tantamount to compelling him to avail himself of the concession.
Once a person is compelled to avail himself of a concession, it ceases to be a concession and, instead, becomes a condition. Such an interpretation would mean that the promoters will have to go in for an IPO either at the very beginning or at the time of completing ten years, which obviously is not quite logical.
It would be appropriate to mention here the recommendation of the Malhotra Committee in this regard. As per the recommendation 13.8 (iii) of the committee, “the promoters' (that is, all the promoters put together) holdings in a private insurance company should not exceed 40 per cent of the total. However, if the promoters wish to start with a higher holding, they should be permitted to do so provided their holdings are brought down to 40 per cent within a specified period through public offering” of 40 per cent on the combined holdings of all the promoters. However, the wording of Sec.6AA (1) of the Insurance Act lacks such clarity. As per this Section, “no promoter shall at any time hold more than 26 per cent or such other percentage as may be prescribed of the paid-up equity capital of an Indian insurance company.” This gives an impression that each promoter can hold up to 26 per cent of the total paid-up capital. That is, if the number of promoters is 4 or more, they can, among themselves, hold the entire paid-up capital and need not go in for a public issue at all, a typical example of drafting inadequacy.
Once the ten-year period is over, the promoters have to give a definite, time-bound plan of action to bring down their holdings to 26 per cent. That is, the issue of an IPO cannot be deferred indefinitely.
It follows that a strategic sale, after which the combined holdings of promoters remain above 26 per cent, cannot be permitted after ten years.
Such strategic sales can thus be permitted only within ten years and so the agreement between Reliance Life and Nippon Life falls well within the scope of the Insurance Act.