'It is imprudent on the part of Indian insurance companies to invest out of the shareholders' fund in a private limited company.'
Indian insurance companies investing in the Bima Sugam India Federation incorporated as a private limited company is imprudent voiced the first chairman of IRDAI, a Supreme Court lawyer specialising in insurance and corporate laws and a CEO of an insurance company.
The insurance regulator giving an exception to the legal provision is tantamount to backdoor legislation, the apex court lawyer added.
Six public sector insurers have been asked to contribute Rs 31.57 crore (Rs 315.7 million) as their share of equity without any prospectus or any other document but just based on a resolution passed at the extraordinary general meeting of the Bima Sugam India Federation.
A total of 58 Indian insurers have been asked to contribute a sum ranging between Rs 4.99 crore (Rs 41.9 million) to Rs 6.60 crore (Rs 66 million) totalling about Rs 330 crore (Rs 3.30 billion) towards the equity capital of Bima Sugam India Federation.
"It is imprudent on the part of Indian insurance companies to invest out of the shareholders' fund in a private limited company. The insurers cannot invest in a private limited company from their policyholders' fund," N Rangachary, the first chairman of the Insurance Regulatory and Development Authority of India (IRDAI), told this correspondent.
It was Rangachary who had laid the regulatory path for insurers after the sector was opened up for private players.
The path laid more than twenty years ago has stood the test of time with no major failures.
The core issue is whether Indian insurers can invest in the Bima Sugam India Federation, a not for profit company registered as a private limited company under the Companies Act.
IRDAI has categorically recommended and silently mandated Indian insurers to invest in the Bima Sugam India Federation.
"The statutory embargo as enshrined under section 27A(4) of the Insurance Act is unequivocal that an insurer is prohibited from investing in a private company. The section does not carve out an exception for investment in a non-profit organisation," D Varadarajan, a Supreme Court lawyer specialising in insurance and corporate laws.
Varadarajan was also a member of the K P N Committee on Insurance Laws and Reforms and other expert groups constituted by IRDAI.
"Hence, tweaking of investment regulations in purported exercise of regulation making to perpetuate investments in Bima Sugam, in my considered view suffers from the vice of excessive delegation and would tantamount to backdoor legislation by the regulator, which is abhorrent to the power of Parliament, and cannot be countenanced at law or at all," Varadarajan added.
"As the PSU boards have representation from the administrative ministry concerned, it is not known as to how the boards would authorise such outflows, when the solvency margin is in the red," Varadarajan said.
Further. there are some insurance companies with their solvency margins lower than the stipulated 1.5 times.
Investing Rs 5 crore to Rs 6 crore (Rs 50 million to Rs 60 million) in good securities would beef up their financial strength and better the solvency margins then sinking that amount in a start-up whose business plan is not known, they added.
Simply put, Bima Sugam India Federation, the brainchild of IRDAI, is touted as a marketplace or platform (like Amazon) for the entire insurance ecosystem.
Industry officials said that the idea is being executed through the two industry lobby bodies -- the General Insurance Council and the Life Insurance Council.
"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," former IRDAI chief general manager S N Jayasimhan told this correspondent. "The term controlled funds includes shareholders funds as well."
"Nevertheless, the question is how can IRDAI direct insurers to invest in a particular company? If permitted now, IRDAI is taking the role of investment committee under the board of the insurer." Jayasimhan added.
"Also, IRDAI will be held responsible for the performance of such investment. All that IRDAI can do is to lay down the prudential norms, for where an onsurer can invest and fix limits for individual investments, group, promoter group and industry sector," Jayasimhan 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, 2016.
It is common knowledge that the regulations cannot override the Act governing the sector.
Varadarajan said IRDAI does not enjoy untrammeled powers, and the powers, duties and functions are duly codified under the IRDA Act, 1999.
The plenary powers conferred on IRDAI under section 14(2) of IRDA Act are subject to the clear mandate and caveat of Section 14(1), which lay down categorically that the Authority shall have the duty to regulate, promote and ensure orderly growth of insurance business and reinsurance business, subject to the provisions of the IRDA Act and any other law for the time being in force-that is Insurance Act and other laws, Varadarajan remarked.
Hence, it is imperative that the powers of the Authority shall be subject also to provisions of the Insurance Act and other laws.
Speaking about the unclear business model, a CEO of a private insurer said the way the entire portal is structured, it will work only in the case of standard insurance products and not where the policies offer different risk covers.
"What is the cost, revenue model for the Bima Sugam India Federation is not known. How it will be funded and till now how much has been spent and wherefrom it got the resources were not disclosed. But companies have been asked to contribute about Rs 330 crore and another Rs 200 crore (Rs 2 billion) over the next three years," the official added, speaking on condition of anonymity.
It is not known who had nominated the directors on the board of Bima Sugam India Federation and how did the board come into being, industry officials question.
With the government deciding to allow 100 percent foreign holding in an insurance company, IRDAI's decisions relating to the Bima Sugam India Federation may deter newer players, industry officials also said.
Venkatachari Jagannathan can be reached at venkatacharijagannathan@gmail.com
Feature Presentation: Rajesh Alva/Rediff.com
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