To monitor investee firms closely, IRDAI revises norms for insurers

With NBFCs and HFCs undergoing crisis in recent times, insurance regulator Insurance Regulatory and Development Authority of India (IRDAI) has issued a revised set of stewardship guidelines for insurance companies to closely monitor the companies they invest in, intervene if required, and also compulsorily vote if they own more than a specified amount of equity in the firm.

“Insurance companies 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 the high level,” noted IRDAI in a recent circular, adding that insurance companies should play an active role in these firms. Stewardship activities are aimed at monitoring and engaging with investee companies on matters such as strategy, performance of risk, capital structure, and corporate governance, including culture and remuneration. The IRDAI had initially issued guidelines on stewardship activities in March 2017.

A clear policy

Under the revised guidelines, the IRDAI has asked insurers to have a clear policy on voting and disclosure of voting activity every quarter. Insurers with assets under management (AUM) of up to ₹2.5-lakh crore and holding three per cent or more of the paid-up capital in an investee company, or insurers with an AUM of over ₹2.5-lakh crore and more than 5 per cent of paid-up capital in an investee company, should compulsorily vote, said the IRDAI. Insurers should also report periodically on their stewardship activities.

The guidelines have also asked insurers to decide on the responsibilities they would undertake as part of their stewardship policy and work out clear guidelines on them.

It has also said that insurers should have a clear policy on how to manage conflict of interests in fulfilling their stewardship responsibilities and publicly disclose it. It has also stressed that insurance companies must monitor their investee firms and that they can also nominate a member on the board of these companies.

The IRDAI has also said that insurers must have a clear policy of intervention in their investee companies, which could include meetings and discussions with the management for constructive resolution of the issue and, in case of escalation, meetings with the boards, collaboration with other investors, and voting against decisions.

For issues that require larger engagement, insurers should have a clear policy for collaboration with other institutional investors, said the revised guidelines.

Voting activities

Industry experts said the revised guidelines focus more on voting activities, and the tone of the circular urges them to be more responsible. However, while it would be easier for larger insurance companies such as Life Insurance Corporation of India to take an active interest in its investee companies, smaller insurers may find it difficult.

“The revised norms are welcome as they will make insurance companies more vigilant about voting. But how far the investee companies will entertain the small investors in active management of the company is difficult to gauge,” said Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life insurance.

Joydeep K Roy, Partner and Leader, Insurance, PwC India, also said that for insurers with large portfolios, this should be the next natural progression to keep track of their investment health, which is critical to deliver returns to either policyholders or shareholders.

“However, for smaller insurance companies with small portfolio and AUM, this will be onerous as it is difficult to even attract investment talent with small book size,” he said, adding that it could result in rationalisation of their portfolio in terms of the number of companies they will invest in, which can become detrimental to their portfolio diversification.

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