new governance order: potential implications

3OCTOBER - DECEMBER 2013

THE JOURNAL OF INSURANCE INSTITUTE OF INDIA

New Governance Order: Potential Implications

Praveen Gupta

Chief Executive Officer,

Raheja QBE General Insurance Co. Ltd.,

Windsor House, 5th Floor, CST Road,

Kalina, Santacruz (East),

Mumbai - 400098.

[email protected]

NEW GOVERNANCE ORDER

The recent passage of the

Company Bill in India has had

a subdued response from the

Indian insurance industry. The

reasons are understandable

but the implications in terms of

threats and opportunities are

what need to be realised and

fathomed. Given this backdrop

it is indeed interesting that the

Insurance Institute of India

and the Institute of Company

Secretaries have joined

hands to launch a diploma

course in governance and risk

management. It is not just

the Bill alone impacting the

governance space but several

forces unleashed in our socio-

economic-political arena.

Implications of the Bill for

governance:

Independent directors: Corporate

boards will have to have a third

of their members as independent

members. They are more stringently

defined and their tenures will be

limited to two terms to a maximum of

10 years. An independent director can

hold a maximum of 20 directorships.

Corporate Social Responsibility:

The Bill comes close to making 2

percent spending on CSR mandatory.

However, it does not define CSR.

Moreover, if a corporate does not

spend the amount it must explain why

in the annual report.

Women directors: The world over the

endeavour is to diversify the boards

with more women representatives.

However, even in the world’s best

known companies women account for

only 11 percent of total directorships.

In India, a sample of 89 companies

with more than USD 1 billion in

market valuation, the percentage of

women is less than 7 percent. The

challenge here would be in terms of

identifying and fast tracking the short

supply of talent.

Class action suits: One of the most

significant provisions in the Bill is

the enabling of tort action and class

action suits. We saw the frustration

of Indian retail shareholders of

Satyam Computers for their inability

SepcialA R T I C L E

4 OCTOBER - DECEMBER 2013


to bring class action against the

promoters, while Mahindra Satyam

settled lawsuits of shareholders in

the US and UK. The new provision

makes it possible for shareholders

of government owned companies

to sue the government. Class action

suits have to be filed before National

Company Law Tribunal(NCLT) first.

The formation of NCLT is work in

progress.

Key Managerial Personnel: The

KMP in relation to a Company are

defined to mean the CEO or the MD;

the Company Secretary; the Whole-

Time Director; the CFO and such other

officers as may be prescribed.

Auditors: The Bill prescribes some

very strong measures in terms

of fines, penalties and right of

stakeholders of a Company to claim

damages or compensation in the

form of a class action. The Bill also

stipulates the constitution of the

National Financial Reporting Authority

(NFRA) to oversee the quality of

service of professionals associated

with compliance of accounting and

auditing standards.

Implications for insurers:

Corruption/ Bribery: World over and

particularly the markets that most

Indian corporates deal with, this is a

major challenge. Any shortcomings

on part of a corporate would have

fiduciary implications.

Employment practices/ sexual

harassment: Corporate manslaughter

and sexual harassment are major

triggers for not just the multinationals

but increasingly domestic business

entities.

Class action: Just like the first two

triggers in this list, class action

too would have implications for

D&O underwriters. Unlike the two

the mechanism for this one for the

domestic market is yet to be in place.

However, any client with a global

listing already faces this possibility.

With it comes the cost of litigation.

Insolvency: While insolvency is a bad

word in our environment, an improper

disclosure can lead to denial of

potential claim by D&O underwriters.

Independent directors beware: As

underwriters we can sense the growing

anxiety of professionals whilst

considering a position of independent

director. ‘Look before you leap’ is an

advice you may at your diplomatic

best may wish to render. A good quality

D&O cover may very well become a

good reason to woo a good professional

as an independent director.

Government entities: Level playing

would mean government owned

companies would be at par with any

other company in terms of governance

standards. Likewise they would be

equally vulnerable for their errors and

omissions.

Regulatory actions: Could become a

major set of triggers for claims under

fiduciary breaches.

Contract certainty: Increasingly the

policy wordings of insurers will need

to stand the legal challenges of our

courts. As and when insurers list,

their governance levels would also be

susceptible to any vulnerabilities in

this space.

M&A/ Run-off management:

Consolidation of the insurance

markets always sets into motion

mergers and acquisition and the need

to manage run-off portfolios. That is

when many a can of worms open up.

The valuation and disclosure aspects

may be challenged by entire gamut of

stakeholders.

Dearth of actuarial resource: A major

supply side issue puts the entire

insurance business under pressure.

Not just on the pricing front but

claims reserving side, as well. The

recent ‘ballooning’ of the Motor TP

Pool is symptomatic of this condition.

Boards of insurers would need to be

very wary of this not repeating again.

Fault lines: As insurers and related

businesses list, a new breed of

analysts will surface. Projections and

assumptions on valuations and the

likes of such entities will be vigorously

challenged. Making their boards

susceptible to the fault-lines.

The advent of the new Company Act, still

a work in progress, poses both threats

and opportunities to Indian insurers.

The emerging risks open up tremendous

opportunities for both D&O liability and

Professional Indemnity insurance. No


5OCTOBER - DECEMBER 2013


independent director worth his or her

salt would like to join a board, howsoever

illustrious, without a protection in the

form of a D&O cover. In the present barely

under 10% of all Indian listed companies

buy insurance to protect its directors

and officers. Many of those who do buy

have questionably low limits not even

adequate to fund potential legal expenses.

Gatekeepers of governance like the

Company Secretary will of course need

their share of protection too. However,

independent CS and auditors will be prone

to professional errors and omissions.

Hence a crying need for PI insurance.

Companies buying D&O cover would

not be required to allocate the premium

expense as remuneration to covered

individual, unless the individual is found

guilty.

While the arrival of the new Company

laws has immediate implications on the

fiduciary and governance plane, this need

to be also examined in context of a larger

unfolding transformation. Here are some

key drivers:

Lifestyle: Growing middle class;

demographic dividend churns youthful

population; increasing buying power

and impinging global influence;

openness to experiment.

Awareness: An all-pervasive social

media and an assertive mass media all

operating on a virtual basis. Enlarges

the canvas for libel and slander.

Consumerism: Informed buyer

demands choice and begins to hanker

for quality and consistency. Functional

consumer courts. A wide definition

for services. Growing number of

actions on account of faulty products

and services. Increasing number of

claims under medical malpractice

against doctors and medical

establishments.

Globalisation: Indian vendors

are regularly sued for errors and

omissions. The learning is percolating

within the overall environment. Undue

exposure of some trades to the North

American jurisdiction and its unique

challenges.

Intellectual Property: The internet and

accessibility via hand held

devices suddenly unleashes both

development and application of a

vast hinterland’s creativity across the

global village. Similarly, cyber crime

can wreck far-reaching damage and

cause serious privacy intrusions like

never before.

Statutory push: This is one class

which will benefit most from

such initiatives. There are great

expectations from SEBI to make D&O

mandatory.

Right to information (RTI): Imposition

of this form of disclosure is indeed a

silent revolution forcing governance

particularly on the realms hitherto

inaccessible.

Conclusion:

The emerging governance order - partly

driven by the new Company Law and

the rest by multiple drivers jointly and

severally impacting India - will present

challenging opportunities and threats

to its insurance industry as much to

the fiduciary India. The time for liability

classes of insurance to play an increasing

role in the daily lives of existing and

potential insureds has arrived. The

relative shrinkage of property classes

and the rapid growth of motor and health

segments present a backdrop in a state

of flux. Learning from examples of Enron

let us remember that physical assets of

a business entity may still be around but

the brand may disappear due to reputation

and governance deficits. While the liability

class of portfolio is set to grow, let us also

remember that this is a long-tail portfolio

which must be priced, underwritten and

serviced by specialists or with specialist

assistance. We want the insurers to

be around when the claims come. The

collaboration between the two Institutes

will hopefully be a window through which

we will continue imbibing the potential

implications from the ‘gatekeepers of

governance’. TJ

The emerging governance

order - partly driven by the

new Company Law and the

rest by multiple drivers

jointly and severally

impacting India - will

present challenging

opportunities and threats

to its insurance industry as

much to the fiduciary India.


new governance order: potential implications

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