IRDA penalizes insurance company for failing to report change in promoter

IRDA has by its orders dated August 26, 2010[1] penalized Bharti AXA Life Insurance Company Limited and Bharti AXA General Insurance Company for failing to report the change in the shareholding of the promoter entity of the insurance company. Bharti Ventures Limited holds 40% of the shareholding in both the companies. 99% of the shareholding in Bharti Ventures Limited was held by a partnership firm M/s Bharti Enterprises, which was converted into a company, namely Bharti Enterprises (Holdings) Private Limited with effect from January 8, 2010. This restructuring converted Bharti Ventures Limited into a subsidiary company of Bharti Enterprises (Holdings) Private Limited.

It may be noted that under Section 26 of the Insurance Act, 1938, every insurer is under an obligation to furnish to the IRDA the details of any alteration made in the particulars furnished at the time of seeking registration. In addition, under IRDA (Registration of Indian Insurance Companies) Regulations, 2000 (“Registration Regulations”), an Indian promoter company cannot be a subsidiary company of another company.

In its order, IRDA has found the company guilty on two accounts. Firstly, on account of non-compliance with the requirement to intimate the material change in the particulars submitted at the time of registration. Secondly, for breach of Regulation 2(g)(i) of the Registration Regulations, which mandates that the Indian promoter company cannot be a subsidiary company.

While IRDA may be right in imposing penalties on account of the failure of the companies to report in time the alternation in material information, it is time that the anomaly existing in Regulation 2(g)(i) is rectified. It appears highly illogical to allow the foreign promoter to invest through investment vehicles (which incidentally can be subsidiary companies), while insisting that the Indian promoter ought not be a subsidiary company. The definition of the ‘Indian promoter’ in Regulation 2(g)(i) of the Registration Regulations intended to prevent Indian promoter companies from being subsidiaries of foreign companies, the intention could never have been to put a blanket prohibition on investment by Indian promoters through subsidiaries. The inadvertent drafting error has now become the bane for a number of Indian promoters. It is high time that the Indian promoters make representations to the IRDA for amendment of Regulation 2(g)(i) of the Registration Regulations.

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[1] The orders may be found at http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo822 and http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo823