An issue of significant relevance to financial regulators world-over is the fitness and propriety of key shareholders of financial entities. The objective of this blog is to analyse IRDAI’s approach to assessment of ‘fit and proper’ status of significant owners of insurers, especially in light of the order passed by the IRDAI in the matter of M/s Sahara India Life Insurance Company Limited (“Sahara Life”) on December 30, 2020 (“IRDAI Order”). Before we delve into IRDAI’s approach in this regard, it is important to trace the chronology of events, leading to the IRDAI Order.
|2015||IRDAI observed financial propriety and governance issues in Sahara Life in FY 2014-15|
|March 14, 2017||IRDAI appointed an ‘Investigating Authority’ upon lack of response to its requests for clarifications|
|June 8, 2017||Investigating Authority submitted report to the IRDAI and observed that Sahara Life’s promoter company, Sahara India Financial Corporation Limited (“SIFCL”), had been declared ‘not fit and proper’ by the Reserve Bank of India (“RBI”) and Securities and Exchange Board of India (“SEBI”)|
|June 12, 2017||IRDAI appointed an Administrator to manage the affairs of Sahara Life and submit a report on the state of its affairs|
|June 22, 2017||The Administrator’s report indicated that there was “total failure of the governance system of Sahara Life and the interests of the policyholders are at stake”|
|June and July 2017||IRDAI directed Sahara Life to immediately cease procuring/ collecting proposal deposits/ underwriting new business and shortlisted M/s ICICI Prudential Life Insurance Company Limited (“IPru”) to take over the ‘life insurance portfolio’ of Sahara Life|
|July 31, 2017||Aggrieved by multiple orders of the IRDAI, Sahara Life filed its appeals before the Securities Appellate Tribunal (“SAT”)|
|January 11, 2018||The transfer of Sahara Life’s life insurance portfolio to IPru was overturned by SAT and restored to the file of the IRDAI|
|January 15, 2019||IRDAI issued show-cause notice (“SCN”) to Sahara Life, owing to the unsatisfactory responses of the insurer|
|December 30, 2020||IRDAI passed the IRDAI Order in relation to inter alia the ‘fit and proper’ status of Sahara Life’s promoters|
While the SCN dealt with eight charges, the focus of this blog will be on the charge(s) levelled by the IRDAI in relation to the ‘fit and proper’ status (or the lack thereof) of Sahara Life’s promoters. SIFCL, M/s Sahara Care Ltd. (“SCL”), M/s Sahara India Commercial Corporation Ltd. (“SICCL”) and M/s Sahara Infrastructure and Housing Ltd. (“SIHL”) have been classified as Sahara’s Life promoters. SIFCL and SCL collectively hold 90% of the shares in Sahara Life, with SIFCL holding 50% and SCL holding 40% shareholding in Sahara Life. SICCL holds 4.37% shares, SIHL holds 3.82% shares in Sahara Life.
IRDAI’s Approach to ‘Fit and Proper’ Assessment – Proper?
The IRDAI has enlisted illustrative criteria for determining ‘fit and proper’ status of: (a) shareholders holding 5% or more shares in listed insurance companies; and (b) private equity funds/ special purpose vehicles holding shares in an insurer. In case of acquisition of shares of insurers, the IRDAI requisitions certain information from the proposed transferee for assessment of its ‘fit and proper’ status. Though the IRDAI has not specified any ‘fit and proper’ criteria for applicants who wish to set up an insurance company, the IRDAI has incorporated key requirements for the same, albeit without an express reference to ‘fit and proper’ criteria.
The IRDAI made an interesting observation in the IRDAI Order that the assessment of ‘fit and proper’ status for the promoters of the applicant insurance company is undertaken by it only at the time of registration of the insurer. The IRDAI is of the view that it is implicit that the promoters are expected to maintain the ‘fit and proper’ status on a continuing basis during the operational life of the insurance company. However, there is no express requirement in the regulations issued by the IRDAI to ensure compliance with such condition on an ongoing basis. That said, it is pertinent to note that the IRDAI has specified continuous monitoring arrangements for due diligence in case of shareholders holding 5% or more shares in listed insurance companies. Despite IRDAI’s extensive reliance on insurance core principles and general principles enunciated by the International Association of Insurance Supervisors (“IAIS”), including in the IRDAI Order, it is surprising to see that the IRDAI has not opted to include an express condition that significant owners of unlisted insurers meet the applicable fit and proper requirements on a continuous basis.
The Sahara Life Saga – Highlighting Lack of Continuous Monitoring Mechanism
In terms of Section 26 of the Insurance Act, 1938 (“Insurance Act”), an insurer is required to forthwith notify the IRDAI full particulars of any alteration, which affects any of the matters that were required to be furnished to the IRDAI at the time of grant of registration. While interpreting the aforesaid provision, it appears that the IRDAI has taken the view that any ‘material’ change/ alteration in the status of the promoters of insurers is required to be notified to the IRDAI immediately. In 2010, the IRDAI had imposed penalties on Bharti AXA General Insurance Company Limited and Bharti AXA Life Insurance Company Limited for not intimating the IRDAI of the material changes in the ownership pattern of their promoter entity, in terms of the requirement specified in Section 26 of the Insurance Act. More recently, in the IRDAI Order, the IRDAI observed that Sahara Life did not intimate the IRDAI of the material alteration in the status of SIFCL, from the position at the time of grant of registration under the IRDAI (Registration of Indian Insurance Companies) Regulations, 2000.
Accordingly, it could be contended that the IRDAI’s approach to monitoring the compliance of significant owners of unlisted insurers with ‘fit and proper’ status is one which requires the insurers to intimate any ‘material alteration’ in the status of its promoter from the position at the time of grant of registration. Taking this approach, the IRDAI expects the regulated entity to be proactive in intimating such alteration and allows the insurers to exercise their discretion on what constitutes ‘material alteration’, given the element of subjectivity in this regard.
What transpired in the matter of Sahara Life is a good case-in-point on why IRDAI’s current approach leaves scope for misuse and misinterpretation. In September 2015, the RBI had cancelled the NBFC registration of SIFCL on the grounds of serious financial irregularities and indiscipline (including transfer of funds to related parties) and separately initiated an application for liquidation of SIFCL. In July 2015, the SEBI declared SIFCL as not ‘fit and proper’ to be a sponsor of Sahara Asset Management Company Private Limited. Separately, the IRDAI noted that the financial position of SICCL was unknown since its latest financial statements were not furnished by Sahara Life when requisitioned. In addition, pursuant to review of the financial statements of SCL and the report of the statutory auditors for FY2018-19, the IRDAI was of the view that the financial position of SIFCL, SIHL, SICCL and SCL did not inspire confidence as regards the financial capabilities of Sahara Life’s promoters in fulfilling the future capital needs of Sahara Life.
Taking a Cue from Other Regulators
Given that the assessment of ‘fit and proper’ status is completely based on the discretion of the regulator, the IRDAI is entitled to take the view that Sahara Life’s promoters have failed to satisfy the ‘fit and proper’ criteria, as promoters of an insurance company on an ongoing basis. However, we are of the view that not only should the IRDAI specify the objective criteria for determination of ‘fit and proper’ status of the promoters of unlisted insurers, but also take steps to impose an obligation on insurers to periodically furnish certification confirming compliance of its promoters with such ‘fit and proper’ criteria.
For context, we refer to the RBI’s approach to ensuring that all major shareholders of private sector banks are ‘fit and proper’. Under the Prior Approval for acquisition of shares or voting rights in Private Sector Banks: Directions, 2015 (“Acquisition Directions”), the RBI has prescribed certain continuous monitoring arrangements, which inter alia require such banks to obtain an annual declaration in a specified format, from all its major shareholders within a month of closure of the financial year. Further, the boards of such banks are required to deliberate on the declarations obtained from the major shareholders and make an assessment about the ‘fit and proper’ status of such shareholders. The banks are also required to furnish a certificate to the RBI, regarding continuance of the ‘fit and proper’ status of all its major shareholders, by the end of September every year. In case any major shareholder is assessed to be not ‘fit and proper’, the concerned bank is required to report the same to the RBI immediately.
The Sahara Life saga has underlined the need to further strengthen the regulatory framework governing the ‘fit and proper’ status of promoters of insurers. Coupled with the IRDAI’s recent experience in dealing with distressed entities, which have insurers within their group, it may be time for the IRDAI to introduce certain regulatory prescriptions to incorporate requirements relating to the assessment of ‘fit and proper’ criteria for promoters of unlisted insurers on a continuous basis. The IRDAI may consider introducing a requirement for the promoters of insurers to furnish a declaration form to the insurer on a periodic basis in relation to inter alia capital adequacy, regulatory proceedings/ adverse notices, etc. Further, the IRDAI may contemplate stipulating a requirement for the boards of insurers to undertake a ‘fit and proper’ assessment of its promoters from time to time and certify the ‘fit and proper’ status of its promoters to the IRDAI on a periodic basis. In addition, the IRDAI may also consider imposing a condition that an adverse ‘fit and proper’ assessment of an insurer’s promoters by other financial regulators shall be deemed as failure of such promoter’s compliance with the ‘fit and proper’ criteria under the IRDAI regulatory framework.
Another step in the right direction is the IRDAI’s proposal to introduce ‘Risk Based Supervision’ for the insurance sector. Since the IRDAI has vide a circular titled ‘Moving towards Risk Based Supervision of the Insurance Sector’ dated October 4, 2018, indicated a change in the process of supervision of insurance entities (moving away from the traditional compliance-based supervision), it is expected that the insurance entities would inter alia be required to review the existing risk/ management culture, adopting risk-based internal audit, etc. It also expected that such an approach to supervision would go a long way in ensuring that policyholders’ interests remain secured, since the IRDAI would have a clearer picture of the insurance entities that are prone to greater risks vis-à-vis their peers (including risks emanating from promoter(s) and group entities).
For any sectoral regulator, protection of interests of the end-consumer is the fundamental purpose of ensuring greater corporate governance practices, which are required to be adopted by the entities it regulates. We believe that such measures, if implemented by the IRDAI, will not just ensure that only fit and proper promoters are allowed to float insurance companies, but also ensure that the insurers continue to remain in the safe hands of fit and proper promoters.
 Paragraph 41 of the IRDAI Order.
 See Clause 12 of the IRDAI (Listed Indian Insurance Companies) Guidelines, 2016 dated August 5, 2016.
 See Clause 7 of the IRDAI (Investment by Private Equity Funds in Indian Insurance Companies) Guidelines, 2017.
 See paragraph 13 of Form B of the IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations, 2015.
 As per Regulation 7(2)(i) and (ii) of the IRDAI (Registration of Indian Insurance Companies) Regulations, 2000, the consideration of requisition for registration application includes “the general track record of conduct and performance of each of the Indian Promoters and Foreign Investors in the fields of business/profession they are engaged in” and “the record of conduct and performance of the directors and persons in management of the Indian Promoters, Foreign Investors and the applicant”.
 Paragraph 34 of the IRDAI Order.
 Paragraph 34 of the IRDAI Order.
 See Clause 13 of the IRDAI (Listed Indian Insurance Companies) Guidelines, 2016 dated August 5, 2016.
 IAIS is a global framework for cooperation and information exchange between insurance supervisors. On July 19, 2017, the Union Cabinet chaired by the Prime Minister Shri Narendra Modi had given its ex-post facto approval for IRDAI’s admission as a signatory to IAIS, Multilateral Memorandum of Understanding.
 Paragraph 18 of the Supervisory Standard on Fit and Proper Requirements and Assessment for Insurers, October 2005 issued by the IAIS.
 Section 26 of the Insurance Act, 1938: Alterations in the particulars furnished with application for registration to be reported: Whenever any alteration occurs or is made which affects any of the matters which are required under the provisions of sub-section (2) of section 3 to accompany an application by an insurer for registration, the insurer shall forthwith furnish to the Authority full particulars of such alteration. All such particulars shall be authenticated in the manner required by that sub-section for the authentication of the matters therein referred to, and, where the alteration affects the assured rates, advantages, terms and conditions offered in connection with life insurance policies the actuarial certificate referred to in clause (f) of the said sub-section shall accompany the particulars of the alteration.
 IRDAI order dated August 26, 2010 (Ref. No: IRDA/F&I/ORD/F&A/134/08/2010)
 IRDAI order dated August 26, 2010 (Ref. No: IRDA/F&I/ORD/F&A/133/08/2010)
 Paragraph 27 of the IRDAI Order.
 Paragraph 15 of the SEBI’s order in the matter of Sahara Mutual Fund dated July 28, 2015, accessible at: https://www.sebi.gov.in/sebi_data/attachdocs/1438083387013.pdf
 Paragraph 47 of the IRDAI Order.
 Paragraph 51 of the IRDAI Order.
 See footnote #3 above.
 Under the Acquisition Directions, a “Major shareholder” is defined as a shareholder having / likely to have an “aggregate holding” to the extent of 5% or more of the paid-up share capital of the bank or 5% or more of the total voting rights of the concerned bank.
 Section 8.1(a) of the Acquisition Directions.
 Section 8.1(b) of the Acquisition Directions.
 Section 8.1(c) of the Acquisition Directions.
 See: https://www.timesnownews.com/business-economy/companies/article/flipkart-cofounder-sachin-bansal-buys-dhfl-general-insurance-in-distress-sale/538305 and https://www.businesstoday.in/current/corporate/anil-ambanis-reliance-capital-invites-bids-for-stake-sale-in-subsidiaries/story/420757.html