The Insurance Regulatory & Development Authority (Irda) has prescribed a minimum lock-in period of five years from the date of certificate of commencement of business of an insurer for the promoters of the insurance company. No transfer of shares of the promoters would be permitted within this period.
The Irda has unveiled the final norms on corporate governance guidelines for insurers. The insurance Act stipulates prior approval of IRDA for registration/transfer of shares exceeding 1% and/or which involve holding of share capital, after such transfer, in excess of 5 % of the paid-up capital of the company (2.5% for banking or investment company).
Primarily, the conflicts of interest in insurance companies arise whenever there are conflicting interests of shareholders, policyholders and management, and there is, therefore, a responsibility on the board to act in the interest of policyholders or prospective policyholders, said IRDA.
The IRDA may in due course also define significant ownership that could attract potential conflicts of interest.
There should be adequate systems, policies and procedures to address potential conflicts of interest and compliance with AS18. These include board-level review of key transactions, disclosures of any conflicts of interest to manage and control such issues. The auditors, actuaries, directors and senior managers shall not simultaneously hold two positions in the insurance company that could lead to conflict or potential conflicts of interest.
The board of directors is required to have a significant number of “independent directors” (as laid down in the listing agreement). The optimum contribution of independent and non-executive directors enhances the quality of business judgment and benefits the shareholders and policyholders.
This is especially important in respect of insurance companies under conglomerate structure and where there is potential scope for transfer of risks and conflicts of interests that affect the group entities.
At a minimum, where the company has a non-executive chairman, at least one third of the directors should be independent and in other cases at least 50% of the directors should be independent. While the above intention is desirable and would facilitate smooth transition on the listing of the companies, the companies should have a minimum of two independent directors as long as they are unlisted. Similarly, where the chairman of the board is non-executive, the chief executive officer should be a whole-time director of the board. As a matter of prudence, not more than one member of a family or a close relative as defined in the Companies Act or an associate (partner, director etc) should be on the board of an insurer. The new norms address the various requirements broadly covering major structural elements of corporate governance in insurance firms, like external audit, and appointment of statutory auditors.