Irdai's revised share-transfer regulations may raise compliance burden

Legal experts say the revised regulations could require more insurance share transfers to seek prior regulatory approval, despite higher thresholds under the SBSR Act

The Insurance Regulatory and Development Authority of India’s (Irdai’s) revised share transfer regulations could narrow some of the compliance relief envisaged under the Sabka Bima Sabki Raksha (SBSR) Act by introducing additional approval requirements linked to ownership thresholds, according to legal experts.

 

The changes come at a time when several foreign promoters are looking to increase their stakes in existing insurance joint ventures, while new investors are evaluating opportunities in the sector following the government’s decision to allow 100 per cent foreign direct investment (FDI).

 

While some legal experts believe the revised framework could result in more transactions requiring prior regulatory approval than envisaged under the Act, some industry executives argue that it strikes a balance between easing smaller investments and maintaining regulatory oversight over significant ownership changes.

 

The amended regulations, notified by Irdai on July 31 under the SBSR Act, require prior approval not only for acquisitions above the prescribed threshold but also when an investor’s total shareholding crosses specified ownership levels.

 

Under the new rules, prior approval is required if a transferee already holds more than 5 per cent of an insurer and the proposed acquisition takes its total shareholding beyond 10 per cent, 25 per cent, 50 per cent or 75 per cent, or makes it the single-largest shareholder.

 

The SBSR Act increased the threshold for mandatory prior approval from 1 per cent to 5 per cent to facilitate investments and reduce compliance requirements. Under the earlier framework, the approval requirement depended solely on the size of the transaction.

 

For instance, if a shareholder with a 13 per cent stake acquired an additional 0.5 per cent, no prior approval was required as the transaction remained below the prescribed threshold. Approval became necessary only if the acquisition itself exceeded the threshold.

 

The revised regulations, however, introduce an additional test. Besides the size of the transaction, investors must also seek prior approval if the acquisition causes their overall shareholding to cross key ownership thresholds, even where the stake being acquired is relatively small.

 

“The move effectively introduces regulatory approvals for transactions that the amended Act appeared to exempt. The Act made it clear that approval should be required only where the transfer itself exceeds 5 per cent. Instead, the regulations require parties to consider not only the size of the acquisition but also whether the resulting shareholding crosses one of several prescribed thresholds. This creates additional complexity in transaction structuring because investors must continuously monitor cumulative ownership levels,” a legal expert said.

 

The expert said the revised framework is likely to increase the number of transactions requiring prior Irdai approval, raising compliance obligations for investors.

 

“It also complicates the structuring of investments, as parties must now assess both the size of the proposed acquisition and its impact on the shareholder’s overall ownership. Since transactions requiring approval cannot be completed until approval is received, investors may face delays affecting financing timelines, market conditions, valuations and investment decisions,” the person added.

 

An insurance industry executive said the primary objective of the changes appears to be giving the regulator greater oversight over evolving ownership structures, particularly as FDI inflows and mergers and acquisitions gather pace.

 

“The new requirements increase the regulatory burden on companies by requiring additional reporting and approvals, which could slow transactions. There is also concern that the regulations give the regulator broad discretionary powers without clearly defined approval criteria or timelines, creating uncertainty for companies,” the executive said.

 

Another insurance industry executive, however, viewed the changes more positively.

 

“Raising the threshold for acquisitions requiring prior approval from 1 per cent to 5 per cent reduces the administrative burden and makes smaller transactions easier. Investors can now make incremental changes within this limit without unnecessary approvals. At the same time, approvals remain necessary when acquisitions cross key ownership thresholds, as these involve significant shareholder rights and potential changes in control. The revised framework balances regulatory oversight with greater ease of doing business,” the executive said.

 

Responding to an industry suggestion to retain the earlier mechanism of permitting acquisitions of up to 5 per cent in a financial year without prior approval, Irdai said: “In case of acquisition of shares, requirement of prior approval is applicable where equity holding is likely to exceed key thresholds, i.e. 5 per cent, 10 per cent, 25 per cent, 50 per cent and 75 per cent.”