Chennai: To ensure better corporate governance and transparency in the insurance sector, the Insurance Regulatory and Development Authority (IRDA) has decided not to issue licences to companies registered as private limited insurance companies under the Indian Companies Act 1956.

According to an IRDA official, prospective entrants in the insurance sector have been asked to register their companies as public limited companies instead. 

"Existing private limited insurers have been asked to become public limited," he said.

Accordingly Aviva Life Insurance Company India Pvt Ltd changed its incorporation status in November 2007 and is now Aviva Life Insurance Company India Ltd.

"Becoming public limited does not mean that the company is planning any public issue. It is mainly to comply with the regulator's directive," said an Aviva spokesperson.

When contacted the spokesperson of the Bangalore-based Metlife India Insurance Co Pvt Ltd said the company was awaiting the Registrar of Companies' sanction for the change in its incorporated status.

Originally a private limited company, another Bangalore-based life insurer, ING Vysya Life Insurance Company Ltd, became a public limited company in 2005 when the promoters changed hands.

Is IRDA correcting a monumental blunder?
Interestingly all three private limited insurers licensed by IRDA are those in the life insurance business.

"That is all the more reason for worry as life insurers deal with large quantum of public funds, generally parked on a long-term basis by policyholders, say 10 to 30 years," says P Prabhakar, a Chennai-based practicing chartered accountant and an insurance sector analyst.

Welcoming IRDA's latest move, he says, "IRDA committed a monumental and pathological blunder in licensing three private limited life insurers."

A blunder? Citing the provisions of Insurance Act 1938 he says, "Section 2C of the Act clearly states that an insurance company should be "public company" " , Prabhakar explains.

According to him the regulator must have relied on the provision of the IRDA (Registration of Indian Insurance Companies) Regulations, 2000 and Section 2(7A) of Insurance Act 1938 inserted in the Act only in 1999.

Regulation 5 of IRDA (Registration of Indian Insurance Companies) Regulations, 2000 reads as follows: "An applicant shall be eligible to apply for requisition referred to in sub-regulation (1) of regulation 2, if such applicant upon registration will be an Indian Insurance Company as defined in section 2(7A) of the Act"

And Section 2(7A) defines an Indian insurance company as one formed and registered under Companies Act 1956. However, it is silent on the nature of incorporation - private or public limited - of the company.

"Whether it is a conscious silence or an unintended omission is not clear. However, the fact that three private limited companies have been permitted by the IRDA shows that it is a deliberate omission. The legal position is delightfully vague and it appears, it has been intended to be so," opines R Ramakrishnan, a member of Malhotra Committee on Insurance Reforms and former executive director (Actuarial) Life Insurance Corporation of India.

Broadly speaking under Companies Act 1956 two kinds of companies can be formed viz private limited and public limited.

Adds Prabhakar, "When the Insurance Act was extensively amended in 1999, Section 2C was not touched. The section is much older than Section 2(7A), which is of 1999 vintage. Logically a new legal provision cannot override its elder unless specifically mentioned."

On the face of it may seem the lacuna was unintended, but it is not so if one reads Section 6A(2) the Insurance Act that deals with voting rights of the shareholders of a public company.

As per this section the voting rights of shareholders in the case of a public company is strictly proportionate to the paid up amount of the shares held up by him.

The section is conspicuously silent about private limited companies. They can fall back on the Companies Act that provides for disproportionate voting rights.

Spokespersons of Metlife India and Aviva India declined to comment on the kind of voting rights the promoters - foreign and Indian- had on their respective shares.

Why not a 'Pvt Ltd' company?
Arguing in favour of private limited insurers an industry official preferring anonymity says, "In the case of a private limited companies transfer of shares can be restricted by the articles of association. This gives comfort to the foreign shareholders who by law can hold only 26 per cent stake. In a public company there is no level playing field for the foreign partner."

Responding to that Prabhakar says, "There cannot be a level playing field between majority and minority promoters."

Nevertheless the field seems to be level in the case of a public limited company as any promoter can exit the venture without seeking other party's permission.

Perhaps what could be considered as negligence or careless in drafting of the insurance law is the mention of Companies Act 1913 in several places instead of Companies Act 1956 - the governing law the Indian incorporated companies.

Transparency is at a premium
Allowing private limited companies to deal with huge public money actually hinders the two good concepts viz corporate governance and transparency.

Under Companies Act anybody can get a copy of a public limited company's annual report from the Registrar of Companies even it is not listed on the bourses.

On the other hand the annual reports of private limited companies are not accessible to the public.

"Look at the banking sector. First of all there are not private limited banks. Secondly each and every bank has to publish its accounts in the newspapers and each and every bank branch displays them in their premises. Why such a transparency is not there in the insurance sector," Prabhakar poses.

Today transparency is at a premium in the insurance sector with very few enlightened companies putting their annual reports on their corporate websites or sharing it with journalists for further dissemination, unlike notable exceptions like Bajaj Allianz.

Counters an executive with a private life insurance company, "Policyholders do not need to know the profit / loss account or the balance sheet of a life insurer as they are not investors or a creditors. It takes at least seven years for a life insurer to break even. If a prospect sees a life insurance company making losses he may not buy a policy."

According to him all the information required by a prospect to decide on a product purchase is available in the public domain.

"IRDA ensures the solvency of insurance companies. So publishing the annual reports will be a competitive disadvantage," he argues.

Strongly disagreeing with that view S V Mony, secretary general, Life Insurance Council of India says, "A policyholder and a prospective policyholder has every right to know the financial health of a life insurer."

According to Prabhakar, IRDA guarantees just the risk / insurance portion of the premium paid and not the safety of the money's invested in the stock markets under the unit linked policies. The policyholder bears the entire investment risk. Hence he has every right to know the financials of the company."

Even an unsecured creditor has a right to repayment whereas a poor policyholder has no recourse in the event a company loses his savings when the stock market collapses.

Prabhakar further adds, , "The time has come for IRDA to stipulate that domestic insurer's of certain age should publish their annual accounts in newspapers. Life insurers should not be allowed to keep their accounts under wraps in perpetuity. A policyholder should know whether the life insurer has sufficient assets to pay off its liabilities."

Only when the accounts are thrown open insurers would be forced to look at their operational efficiencies and not just the top line growth.

Unraveling the embedded values
The other area that IRDA should look at is the calculation of embedded value-the current value of future profits from the existing policies- by the life insurers.

Many life insurers are playing the top line growth game with an eye on coming out with an initial public offering.

Some life insurers have started announcing the embedded value of their business and some have started issuing employees stock options.

The IRDA should start looking at the actuarial assumptions under which the embedded value is calculated so that lay people are not fooled with fancy valuations. 

Perhaps to bring some sort of comparability amongst insurers IRDA could ask the insurers to declare the basis/assumptions on which the embedded value is calculated by an insurer.