Irdai wants insurers to have 'clear policy' as investors

The high-voltage corporate battle between Tata Sons and ousted chairman Cyrus Mistry, which has put institutional investors like insurers and mutual funds under a lot of pressure to take sides, seems to have shaken up the insurance regulator – the Insurance Regulatory and Development Authority of India (Irdai).

In a first-of-its-kind move that many industry players described as "out of the blue", Irdai has floated a discussion paper with draft guidelines for the Rs 25- lakh crore plus insurance industry, with regards to its policies while dealing with investee companies and voting activities. 

The discussion paper called ‘Stewardship Code for Insurers in India’, which the regulator has put on its website, says that the insurance companies have to formulate and have a clear policy on the discharge of their stewardship responsibilities and publicly disclose it. “These are similar to the market regulator, the Securities and Exchange Board of India’s proxy voting guidelines for asset management companies. This will basically force insurance companies to play their fiduciary role and responsibilities as an institutional investor,” said the CEO of an insurance company. 

There are a number of proposals including how insurers should have policies on regularly monitoring investee companies, intervention in their investee companies, collaboration with other institutional investors to preserve the right of policyholders and voting and disclosure of voting activity. “In addition to the regular fulfilment of their stewardship activities, institutional investors should also provide a periodic report to their ultimate beneficiaries (policyholders) of how they have discharged their responsibilities, in a format which is easy to understand,” said the note. 

“Insurance companies, especially Life Insurance Corporation of India, have significant stakes in several companies. But there isn’t much on paper on how they will vote and why are they taking a stand of voting for or against a resolution or abstain. It was understood, mostly verbally, that an insurance company will do what is right for their policyholders. Now, insurers have to have a policy,” said an industry player.    

The paper also touches on an important point: the role of an insurer in companies where they have insider information by the virtue of their stake – something that would be application especially to Life Insurance Corporation of India which has its nominees on many boards. The paper give the guideline that insurers should have mechanisms for regular monitoring of their investee companies in respect of their performance, leadership effectiveness, succession planning, corporate governance, reporting and other parameters they consider important.

“Insurers may or may not wish to be made insiders (actively involved with the investee companies). An insurer who may be willing to become an insider should indicate in its stewardship statement the willingness to do so, and the mechanism by which this could be done,” adds the paper. 

The paper comes at the time when there is a bitter corporate battle raging between Tata Sons and ousted chairman Cyrus Mistry which has brought the focus on the role of institutional players such as mutual funds and insurance companies. Says a CEO of an insurance firm: “There have been several triggers in the recent past, including raising of funds by several companies and the Tatas-Mistry slugfest which has brought the role of insurance companies into focus and whether they are discharging their duties as institutional shareholders.”

As per recent reports, Nusli Wadia, chairman of the Wadia group and independent director on the boards of Tata Steel, Tata Motors and Tata Chemicals, has written to the Securities and Exchange Board of India as Life Insurance Corporation of India and UTI Mutual Fund voted against him in the extraordinary general meetings. “With a policy of providing explanation on why they have voted for/against or abstained from any decision, insurers are also protected from any legal tangles,” said an industry player.

Insurers have to give their comments by February 15 and, once Irdai approves it, the guidelines will have to be implemented within 30 days.   

Insurers need to:

• Formulate a policy on the discharge of their stewardship responsibilities and publicly disclose it
• Have a clear policy on how they manage conflicts of interest in fulfilling their stewardship responsibilities and publicly disclose it 
• Monitor their investee companies
• Have a clear policy on intervention in their investee companies 
• Have a clear policy for collaboration with other institutional investors, where required, to preserve the interests of the policyholders (ultimate investors), which should be disclosed
• Have a clear policy on voting and disclosure of voting activity 
• Report periodically on their stewardship activities