Insurance companies, especially Life Insurance Corporation (LIC), are significant institutional investors in listed companies and the investments are held by them as custodians of policyholders’ funds.
- George Mathew
At a time when defaults, fund diversions and mismanagements have rocked the corporate sector, the Insurance Regulatory and Development Authority of India (IRDAI) asked insurers to play an active role in ensuring high level of corporate governance standards in listed companies in which they have investments.
Insurance companies, especially Life Insurance Corporation (LIC), are significant institutional investors in listed companies and the investments are held by them as custodians of policyholders’ funds. “The state of governance of the investee companies is an important aspect and insurance companies must ensure that investee companies maintain corporate governance standards at high level,” IRDAI said in its revised guidelines on stewardship code for insurers in India.
“Insurance companies should play an active role in the general meetings of investee companies and engage with the managements at a greater level to improve their governance,” it said. “This will result in informed decisions by the parties and improve the return on investments of insurers, which will ultimately benefit policyholders,” IRDAI said. LIC alone invests around Rs 50,000 crore in listed companies every year. Four public sector general insurers, GIC Re and private insurers are also major investors in listed companies.
The regulator’s new guidelines follow mismanagement and poor corporate governance standards in several listed companies, especially in the financial sector, even though insurers hold significant stakes in such firms. The collapse of IL&FS and DHFL are two examples of institutional neglect. Institutions have either remained mute spectators or supported shady and weak promoters at annual general meetings where resolutions come up for shareholders’ nod.
IRDAI had conducted a special training programme for independent directors in insurance companies at the National Insurance Academy, Pune.
As per the code for stewardship of the IRDAI, an insurer should have a board-approved stewardship policy, which should identify and define the stewardship responsibilities that the insurer wishes to undertake and how the policy intends to fulfill the responsibilities to enhance the wealth of its policyholders who are ultimate beneficiaries.
In its revised guidelines, IRDAI said all the insurers need to review and update their existing stewardship policy within three months from the date of issue of the same and the updated stewardship policy needs to be approved by the board of directors. “The updated policy should be disclosed on the website within 30 days of approval by the board by all insurers, alongside the public disclosures,” it said.
The IRDAI code says insurers may decide their own engagement strategy and the stewardship policy should clearly set out the criteria/circumstances in which they will actively intervene. “The policy should provide for regular assessment of the outcomes of intervention by the insurer. Intervention should be considered regardless of whether an active or a passive investment policy is followed,” it said.
The regulator said compulsory voting is required if the insurer’s holding of the paid-up capital of investee company (in percentage) is 3 per cent or above in the case of insurers with assets under management of up to Rs 2.5 lakh crore and 5 per cent and above for insurers with AUM above Rs 2.50 lakh crore. Circumstances for intervention may include, but not limited to, poor financial performance of the company, corporate governance related practices, remuneration, strategy, environmental, social and governance risks, leadership issues and litigations.
“The mechanisms for intervention may include meetings, discussions with the management for constructive resolution of the issue and in case of escalation thereof, meetings with the boards, collaboration with other investors and voting against decisions,” it said.
Various levels of intervention and circumstances in which escalation is required may be identified and disclosed in the stewardship policy. This may also include interaction with the companies through the insurance councils in case of any industry-level issues. Investment committee of the insurer has to consider which mechanism to be opted and escalation of matters in specified cases, the code says. As per the revised code, insurers should exercise their independent judgement with regard to voting decisions on resolutions and should not automatically support the proposals of the board of the investee firm.
IRDAI said insurers should have mechanisms for regular monitoring of their investee firms 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 have more participation through nominations on the board for active involvement with the investee companies. An insurer who may be willing to have nominations on the board of an investee company should indicate in its stewardship statement the willingness to do so and the mechanism by which this could be done,” it said.
It said stewardship activities include monitoring and engaging with investee companies on matters such as strategy, performance of risk, capital structure, and corporate governance, including culture and remuneration. The policy should address all the aspects relating to stewardship activity like managing conflict of interest, training of personnel, monitoring of investee companies, intervention in investee companies, collaboration with other institutional investors and voting activities.