Mergers in the Insurance Sector: Revisiting the Framework under Section 35

[Sajjad is a student at NALSAR University of Law.]

Generally, any corporate restructuring in the form of merger, acquisition, demerger, etc., is provided and regulated exclusively by Chapter XV of the Companies Act 2013. However, for insurance and some other sectors, there are additional regulatory authorizations by their respective regulators.  For an insurance company, the Insurance Regulatory and Development Authority of India (IRDAI), the insurance regulator, authorizes and approves a scheme of amalgamation or transfer. This is provided under Section 35 (Section 35) of the Insurance Act 1938 (Act), which authorizes IRDAI to approve an amalgamation of or transfer of insurance business between two insurance companies of the same class by a scheme prepared under it. 

Section 35 (1) of the Act reads that "no insurance business of an insurer shall be transferred to or amalgamated with the insurance business of any other insurer except in accordance with a scheme prepared under this section and approved by the Authority." Further, an 'insurer' as defined in the Act means an Indian insurance company whose sole purpose is to carry the business of insurance. Taking a literal interpretation, it is understood that the Act permits an amalgamation/ transfer of two insurance companies whose sole purpose is to carry on the insurance business. This means that the Act does not take into account a merger between an insurance company and a non-insurance company. This is where interpretive challenges begin to emerge.

This restriction has been much debated because of the lack of clarity. Still, the IRDAI's stance has been clear by not authorizing any scheme of merger between an insurance company and a non-insurance company. For instance, in 2015, the proposed merger between HDFC Life and Max Life, which aimed to create India's largest private sector life insurer, was ultimately called off. This transaction included a step merger between Max Life, an insurance company, and its holding company, and Max Financial Services, a non-insurance company. This combined entity was supposed to be merged with HDFC Life. The IRDAI never gave the regulatory approval due to concerns related to violation of Section 35. 

Shriram Case: The Revival of the Debate around the Scope of Section 35

The debate on the validity of Section 35 resurfaced again this year when the National Company Law Appellate Tribunal (Chennai bench) in the case of IRDAI v. Shriram General Insurance Company Limited (Shriram case) held that Section 35 of the Act specifically addresses the amalgamation or transfer of insurance businesses between insurance companies only. The tribunal clarified that since the merger involving an insurance company and a non-insurance company is not covered under Section 35, the same could be done through the Companies Act 2013's general provisions. 

In the said proceedings, the IRDAI strongly opposed the merger on the grounds that insurance companies manage public funds in a fiduciary capacity and are subject to a regulatory regime that is distinct from other commercial entities. It contended that insurance businesses are governed by strict solvency, accounting, and reporting norms, with specific legislative requirements for a clear separation between policyholder and shareholder funds. It emphasized that insurance companies' financial statements are prepared in a format entirely different from that of other commercial enterprises. It further argued that the valuation of both assets and liabilities of insurers is governed by the IRDAI (Assets, Liabilities, and Solvency Margin of Insurers) Regulations 2016, which prescribe technical methods unique to the insurance sector. Because of these issues, it stressed that such cross-sectoral mergers would undermine the integrity of the insurance framework. Thus, IRDAI submitted that such mergers should not be permitted under the existing legal structure.

The appellate tribunal negated the IRDAI's argument that Section 35 does not expressly permit a merger of a non-insurance company and an insurance company. It finally approved the amalgamation scheme between the insurance and the non-insurance company through Sections 230-232 of the Companies Act 2013 and validated it. 

The Resultant Fragmented Jurisprudence in Section 35

While the appellate tribunal's interpretation cannot be considered unsound, it does depart from the prevailing regulatory understanding of Section 35. Through harmonious construction, the tribunal applies the Companies Act 2013 to situations not explicitly covered by the Act: mergers between insurance companies and non-insurance companies. Since the Act is silent on such cross-sector mergers, the tribunal treats this as a legal gap, which is then filled by the general merger provisions under Sections 230–232 of the Companies Act 2013. This interpretation does not create inconsistency between the two statutes but clarifies that the Companies Act 2013 operates by default, whereas the Act is silent. 

However, this understanding is not based on legislative intent. It is important to note that before the notification of the Insurance Laws (Amendment) Act 2015 (2015 Amendment), Section 35 allowed the life insurance business of an insurer to be transferred to any person or transferred to or merged with the life insurance business of any other insurer if such merger or transfer was given effect to by a scheme prepared under section 35 and approved by the IRDAI. Such amendment to Section 35, which now replaces "any person" with "other insurer" for purposes of transfer of an insurance business, clearly shows the intent of the legislation to allow the transfer or amalgamation of an insurance business only to another insurer and not "any persons." While this conclusion is inferential and primarily supported by the IRDAI's position in the Shriram case opposing cross-sectoral mergers, neither the legislature through the statement of objects of the 2015 Amendment nor the IRDAI has provided any express justification for prohibiting mergers between insurance and non-insurance companies.

The 2015 Amendment removing the phrase "any person" strengthens the case for a purposive reading that limits amalgamations within the insurance sector. However, it still does not foreclose the possibility of applying the general corporate merger framework where the insurance statute is silent. This lack of legislative precision has forced the tribunal in the recent Shriram case to engage in statutory harmonization, resulting in fragmented jurisprudence.

A More Prudent Approach

A more balanced approach is necessary that does not completely sideline the IRDAI's regulatory role in cross-sector mergers. The Shriram ruling curtailed IRDAI's oversight in such scenarios, which can be risky, especially where transactions are structured to benefit a non-insurer affiliate at the expense of the insurer and its policyholders. 

To maintain a coherent regulation system, the insurance regulator must oversee any merger affecting an insurer. Without IRDAI's involvement, there's no mechanism to ensure that insurance-specific standards continue to apply post-merger. Regulatory scrutiny must remain robust given the fiduciary nature of insurance funds and the sector's unique solvency and accounting requirements. 

Cues can be taken from jurisdictions like the United States. Many US states follow an Insurance Holding Company System framework under which insurance companies must submit various filings for affiliate transactions. Form D is one such filing required for proposed transactions between an insurance company and its affiliates, particularly those that may present conflicts or undue advantages to non-insurance entities. The insurer must file this form with its state regulator at least 30 days before executing the agreement, during which the regulator can raise objections. In the absence of any objections, the transaction is deemed approved. This process ensures regulatory review without creating undue hurdles. A similar 'pre-clearance mechanism' in India could provide a middle path that preserves regulatory integrity while allowing legitimate business structuring flexibility.

Way Forward

The fragmented jurisprudence following the Shriram case, where tribunals stepped in to harmonize overlapping statutes, underscores the urgent need for regulatory clarity. Given the legislative silence on cross-sector mergers and the potential risks identified by IRDAI, a forward-looking solution should be regulatory.

One viable approach would be to adopt a hybrid regulatory framework through an amendment to the IRDAI (Registration, Capital Structure, Transfer of Shares and Amalgamation of Insurers) Regulations 2024 which has laid down detailed procedure for mergers. These amended regulations could formally recognize two distinct merger pathways:

(1) intra-sector mergers between two insurance companies, governed exclusively under Section 35 with the traditional, IRDAI-led approval; and 

(2) cross-sector mergers between an insurance company and a non-insurance company, first scrutinized by a pre-clearance mechanism and subsequently approved either solely through the NCLT-driven process under the Companies Act 2013 or require a full IRDAI-led approval, depending on the specific circumstances of the case.

In the case of a pre-clearance mechanism, parties can seek a binding determination from the Authority on whether Section 35 applies, which would offer ex-ante regulatory certainty. Further, this would preserve regulatory oversight over important questions on solvency, governance, and policyholder protection while avoiding ambiguity.