Can Insurers Invest In Bima Sugam India?

'Investment by insurers in the Bima Sugam India Federation is illegal as it is a private limited company.'

Questions are raised by insurance industry experts on the legality, economic rationality and the equity of the Bima Sugam India Federation asking 58 insurers in the country including the national reinsurer to contribute to its initial capital of about Rs 330 crore (Rs 3.30 billion) by the month end on a private placement basis.

A private limited company (as per its Articles of Association) Bima Sugam India Federation has written to 58 insurers including the General Insurance Corporation of India Limited to contribute towards its capital an amount ranging between Rs 6.60 crore (Rs 66 million) to Rs 4.99 crore (Rs 499 million).

The insurers have to invest from their Shareholders Fund and not from the Policyholders Fund, experts said.

Simply put, the Bima Sugam India Federation is touted as a platform (like Amazon) for the entire insurance ecosystem.

It is not known whether the company will be under the Insurance Regulatory and Development Authority of India's regulatory ambit.

The Bima Sugam India Federation is a not-for-profit company incorporated under Section 8 of the Companies Act 2013.

As per the Articles of Association of the company filed with the ministry of corporate affairs, it is a private limited company.

Industry officials said the idea is basically that of the Insurance Regulatory and Development Authority of India (IRDAI) but being executed through the two industry lobby bodies -- the General Insurance Council and the Life Insurance Council.

Raising the fundamental question about the legality of insurers investing in a private limited company, former IRDAI chief general manager S N Jayasimhan told this correspondent: "As per the Insurance Act Section 27A (4) an insurer shall not out of his controlled fund or assets invest or keep invested in the shares or debentures of any private limited company."

Jayasimhan worked in IRDAI's investment section for nearly two decades. Industry officials have described him to this correspondent "as a stickler for the rules."

Jayasimhan said the term controlled funds includes shareholders funds as well.

"Investment by insurers in the Bima Sugam India Federation is patently illegal as it is a private limited company as per the Registrar of Companies and as per its Articles of Association. So investment is not allowed by the Insurance Act under Section 27A(4)," Jayasimhan remarked.

"Nevertheless, the question is how can IRDAI direct insurers to invest in a particular company?" he asked.

"If permitted now, IRDAI is taking the role of an Investment Committee under the Board of the Insurer. Also, IRDAI will be held responsible for the performance of such investment," Jayasimhan added.

"All that IRDAI can do is to lay down the prudential norms, for where an insurer can invest and fix limits for individual investments, group, promoter group and industry sector," he explained.

IRDAI in a letter in October 2023 informed the General Insurance Council that the competent authority has accorded general approval under Regulation 3(d) of IRDAI (Investment) Regulations, 2016 to the insurers for investing in the proposed company (Bima Sugam Platform) to be formed under section 8 of the Companies Act, 2013, provided the insurers comply with the exposure and prudential norms specified under Regulation 9 IRDAI (Investment) Regulations,

Please note that the equity participation should be well diversified and no single entity shall have a controlling stake, the IRDAI added.

Twelve insurers -- signatories to the Memorandum of Association -- have already subscribed to 120,000 equity shares with a face value of Rs 10.

"The IRDAI regulations cannot override the Insurance Act," remarked Jayasimhan.

Inderjeet Singh, secretary general, General Insurance Council, declined to comment.

Another industry expert, speaking on condition of anonymity. said: "If at all IRDAI want a platform it can form one from its own accumulated funds."

Even if one considers the Bima Sugam India Federation as not a private limited company -- which is not the case now, according to industry experts -- the economic rationale for the investment in a not-for-profit insurance platform is unclear.

"The company cannot declare a dividend when it earns a profit. Whether such a platform would result in cost reduction is also not clear. That apart, the overall capital requirement over a period of five years is expected to be about Rs 500 crore (Rs 5 billion), that is, the industry has to shell another about Rs 200 crore (Rs 2 billion)," an industry expert said, speaking on condition of anonymity.

While the insurers will be making the investment from their shareholders' funds, there are many listed insurers with several public shareholders and their money cannot be risked.

Industry officials murmur that the cost structure for operating personnel recruited is said to be higher than what is even offered for frontline private sector insurers.

As per the business plan for Bima Sugam India, it is said the company will incur a loss during the first three years and start posting a net profit from the fourth year onwards.

The capital infusion needed for the first five years will be about Rs 500 crore.

Be that as it may, the online platform company does not have a basic Web site till now.

Bima Sugam India Federation CEO Prasun Kumar Sikdar and Chief Financial and People Officer Manoj Naik were not available for comment.

Venkatachari Jagannathan can be reached at venkatacharijagannathan@gmail.com