By V. Jagannathan, IANs
Chennai : India’s Insurance Regulatory and Development Authority (IRDA) has decided to allow insurers to operate in India as only public limited companies under the country’s Companies Act to ensure greater transparency.
The regulator has asked existing insurers registered as private limited companies under the Companies Act of 1956 to covert themselves into public limited companies.
“The change is needed for better corporate governance and transparency in the sector,” said an IRDA official.
In line with the regulator’s directive, Aviva Life Insurance Co India Pvt Ltd has become a public limited company. Its new name is Aviva Life Insurance India Ltd.
The Bangalore headquartered Metlife India Insurance Co Pvt Ltd has completed all the formalities for a change in its incorporated status and is waiting for legal sanction by the Registrar of Companies.
The other private limited insurer licensed by IRDA was ING Vysya Life Insurance Co Ltd, which altered its status to a public limited company in 2005 when there was a change in its promoters.
In India, a majority of the companies incorporated under the Companies Act are either public or private limited companies.
Companies where there is not much of public interest involved can be registered as private limited entities and they enjoy some exemptions that are not available to other categories.
According to P. Prabhakar, a Chennai-based chartered accountant and a keen insurance industry watcher, the three private limited life insurers should not have been given licences in the first place as there is no legal sanction for that and life insurers deal with public money.
“As per Section 2C of Insurance Act of 1938, an insurance company should be a public company,” he said.
The IRDA must have permitted the three life insurers based on Section 2(7A) of the same act inserted in 1999 that defines an Indian insurance company as one formed and registered under Companies Act.
Interestingly, while Section 2C explicitly states an insurer should be a public limited company, the new section is silent on the incorporated status.
“In 1999 the Insurance Act was extensively amended and it was then the Section 2(7A) was inserted. However, Section 2C was not touched. Given this position, a new section cannot override another section that has been in existence for several decades,” Prabhakar pointed out.
“The legal position is vague and it appears it has been intended to be so,” said R. Ramakrishnan, a member of the Malhotra Committee on Insurance Reforms.
A reading of Section 6A(2) reveals that it provides for voting rights of shareholders of public limited companies in the same proportion of the paid-up amount of the shares held.
As this section is silent on the voting rights of private limited insurers, the provisions of the Companies Act that allow disproportional voting rights would apply to them.
Responding to the query on how private limited status hinders transparency, Prabhakar said: “Even if it’s unlisted, the annual accounts of a public company are accessible to the people at the Registrar of Companies. In the case of a private limited company, the accounts are not accessible.”
Citing the banking industry, he said there is no bank that is incorporated as a private limited company. Additionally, all banks have to publish their annual accounts.
“In the case of banks, the risk of a depositor is just his deposit, whereas in the case of a policyholder, his family’s future financial security is at risk. There is more public interest in the case of a life insurance company,” said Prabhakar.