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Digit Insurance will refile papers for its $440 million initial public offering (IPO), the company told Reuters on Tuesday, after India's market regulator raised certain compliance issues with employee stock plans in a private letter.

It is the second such setback for Digit's listing ambitions. The company, last valued at $3.5 billion by Sequoia Capital, provides general insurance services and is backed by investors such as Canadian billionaire Prem Watsa.

In September, the market regulator froze Digit's IPO proposal because of certain compliance issues related to share issuances, but later restarted the review.

In a Jan. 30 letter issued by the Securities and Exchange Board of India (SEBI) seen by Reuters, the regulator said it was returning Digit's IPO papers because the company did not comply with regulations by issuing so-called Stock Appreciation Rights to employees.

Such rights allow an employee to receive a bonus equivalent to the rise in the company's stock price over a certain period - something Indian regulations prohibit for companies going public.

Digit was found "not to be eligible for making an initial public offer", according to SEBI's letter, which is not public and has not been previously reported.

The company's IPO is on hold until it changes its employee stock rights to stock option plans and refiles papers with the regulator, said two people with direct knowledge of the matter who were not authorised to speak publicly.

Digit in a statement to Reuters confirmed it had received SEBI's letter, adding it was "currently evaluating amendments to its employee stock appreciation rights scheme."

The insurer said it would refile its draft IPO prospectus with SEBI in due course, but did not give a timeline.

SEBI did not respond to a request for comment.

Digit, founded in 2017 and also backed by Indian investment firm TVS Capital Funds among others, is trying to expand in general insurance.

Separately, it is moving into the life insurance market with its Go Digit Life venture.