Why insurers are uncomfortable with IRDAI diktat on disclosures

M SaraswathyMoneycontrol

From the next financial year onwards, insurance companies are likely to disclose information about shareholder meetings they attended and the voting decisions they took along with the reasons for doing so.

Sector analysts said that insurers traditionally have not engaged too much in shareholder activism. Their activities are mostly restricted to attending board meetings. “Even when voting decisions are put forward, large insurers take a neutral stand and abstain from voting or voting for the management. These activities will now have to be declared publicly along with reasons for them,” said a senior official with a proxy advisory firm.Boardroom discussions have generally been a closed-door affair and there have also been allegations that some insurers declined to vote. The insurers' argument being that what transpires within the four walls of a room should remain within it. 

Insurance Regulatory and Development Authority of India (IRDAI) said that insurers should set out the circumstances in which they will actively intervene and regularly assess the outcomes of decisions they take. In an exposure draft on the Principles of Stewardship to be adopted by the insurers as institutional investors, IRDAI said that the growth in the insurance industry in recent years has resulted in a significant increase in the funds of insurance companies.

It said that intervention should be considered regardless of whether an active or passive investment policy is followed. In addition, a low volume of investment is not, in itself, a reason for not intervening. These include concerns about the company’s strategy, performance, governance, remuneration or approach to risks, including those that may arise from social and environmental matters.Matters such as CEO salaries have also been voted positively by insurers in the past. With the regulator emphasising that these insurers should give a rationale for this, IRDAI may ask for reasons why a salary hike may have been voted for.

Further, the regulator has asked insurers to 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.

At present, Life Insurance Corporation of India (LIC) which is a large investor in companies takes a view on investment in a company or voting for proposals like new ventures or mergers-acquisitions based on the company history and the impact of the activity on its policyholders. Other public sector insurers also tend to follow LIC’s position when it comes to voting on sensitive deals.Now, these insurers will have to take an independent stand on issues rather than siding with other insurers. Even if they do side with LIC during a voting, they would have to clearly justify why they did so. This, said industry officials, is something that public sector insurers may not be comfortable with.

Transactions such as the Maruti Suzuki’s Gujarat deal, Cairn-Vedanta merger, removal of Cyrus Mistry as Tata Sons Chairman were some where voting by the insurance companies could make or break the deal. However, neither LIC nor other insurers made any disclosures on whom they voted for and why.

If IRDAI’s diktat is implemented, all such decisions will be made public. Based on what decision the insurer took, proxy advisory firm officials said that both the regulator and the finance ministry could question some of their decisions as well. Even otherwise, investments in debt-laden companies by larger insurers have been questioned in the past by the ministry. With this, the enquiries are stated to increase.

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 have to indicate in its stewardship statement the willingness to do so, and the mechanism by which this could be done.

Insurers will expect investee companies and their advisers to ensure that information that could affect their ability to deal in the shares of the company concerned is not conveyed to them without their prior agreement. 

IRDAI said that these principles are intended to strengthen the role of insurers as stewards on behalf of the policyholders. It added that the adoption of the principles will improve the confidence of the policyholders in the insurers on one hand and also ensure better corporate governance and decision-making at investee companies on the other.