Insurance regulator bracing for spat with judiciary

CHENNAI - Tasting success in the turf war with the Securities and Exchange Board of India (SEBI) last year in connection with regulating unit-linked insurance policies (ULIPs), the insurance regulator seems to be gearing up for another bout, but this time with the judiciary, say insurance industry officials.

Citing Insurance Regulatory and Development Authority’s (IRDA) recently released draft norms for mergers and acquisitions (M&A) of non-life insurers, senior lawyers and industry officials told IANS that the insurance regulator is set to incur the judiciary’s wrath.

As per the norms, IRDA proposes to sit on judgment on high courts’ decision on merger of non-life insurance companies.

Officials of the non-life sector questioning the need for a separate M&A regulation are unhappy with some of the proposals - the high fees for processing M&A proposals, the need for a valuation of the enterprise by an independent actuary and the need for informing every policyholder about the merger, given that the contracts are largely of one year in duration.

Listing out the procedure for M&A of non-life insurance companies, IRDA said that it would first issue an in-principle approval on application by the transacting parties with relevant documents.

The draft norm notes: “…subject to the in-principle approval of the Authority, the insurers shall approach the relevant court/ tribunal for confirmation of the scheme of arrangement in terms of sections 391 to 394 of the Companies Act, 1956, which schemes shall, in turn, be subject to the final approval of the Authority.”

Reiterating that, IRDA said the approval by a particular high court is for the purpose of compliance with the procedure under the Sections 391 to 394 of Companies Act “….without impeding, prejudicing or diminishing the powers of the Authority in any manner to review and approve the scheme of arrangement…”

When queried about this condition and its legality, senior advocate Arvind P. Datar told IANS: “Once the High Court approves the scheme of amalgamation, nobody can review it. The only option available is to go on appeal.”

“The IRDA has certainly gone wrong on that part. This is only a draft norm and I expect IRDA would correct its error,” D. Varadarajan, a Supreme Court lawyer specialising in company and insurance laws, told IANS.

Apart from the lawyers, senior industry experts are also aghast at the draft norm wording and wondered why IRDA was planning to take on the judiciary.

On the need for such regulations, IRDA cited the absence of provision similar to Section 35 of the Insurance Act that governs the amalgamation and transfers of life insurance companies.

According to legal experts, when a sectoral law - Insurance Act in this case - is silent on a particular aspect, then the provisions of general law - Companies Act - would come into play.

So if the Insurance Act is silent on M&A of non-life insurers, then the provision of Companies Act would apply, more so as the players are incorporated under the said Act, lawyers said.

Former chairman of General Insurance Corporation of India (GIC) S.V. Mony told IANS: “Unlike other businesses, insurance business is different as the interests of policyholders have to be protected. There are long tailed liability policies and the interests of policyholders have to be protected.”

Experts also say IRDA does not have unfettered right to come out with regulations over-riding the provisions of Insurance Act or other laws.

Industry officials are fuming at the high processing fees - ranging between Rs.5 million to Rs.50 million - proposed by IRDA in the regulations.

A chief executive officer of a private insurer told IANS: “I don’t understand the rationale for this merger processing fees. Insurers pay an annual licence fee and the merged entity will continue to pay the licence fee. Further, the fees charged should be commensurate with the work involved and the value perceived.”

On the issue of getting the companies valued by an independent actuary, he said: “In M&As, the price is arrived by the buyer and the seller after due diligence and valuation. I wonder why IRDA would like to have the right to appoint an independent actuarial consultant to carry out actuarial valuation.”

An e-mail sent to IRDA asking for clarification remained unacknowledged.