IRDAI Revises Stewardship Policy For Monitoring Investee Companies

Following the recent troubles at a number of non-banking finance comapnies (NBFCs) and housing finance companies (HFCs), the 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 coordinate with other institutional investors for these investee companies.

“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 high level,” the IRDAI has noted in its recent circular, adding that 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.

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.

Under the revised guidelines, the IRDAI has 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 can also nominate a member on the Board of these companies. “Areas of monitoring which shall include company strategy and performance - operational and financial, industry level monitoring and possible impact on the investee companies, quality of company management and Board, leadership, corporate governance including remuneration, structure of the Board (including Board diversity and independent directors) and related party transactions, risks including Environmental, Social and Governance (ESG) risks and shareholder rights and their grievances,” the IRDAI said, adding that insurers may also identify situations which may trigger communication of insider information.

The IRDAI also added that the 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, the revised guidelines have said, adding that insurers should have a clear policy on voting and disclosure of voting activity.

Insurers with assets under management of up to Rs 2.5 lakh crore and holding three per cent or more of the paid-up capital in an investee company or insurers with AUM of over Rs 2.5 lakh crore and more than 5 per cent of paid-up capital in an investee company should compulsorily vote, the IRDAI has said.

Insurers should also report periodically on their stewardship activities. “All the insurers need to review and update their existing stewardship policy based on the Revised Guidelines on Stewardship Code for Insurers in India 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 IRDAI has said, adding that it should also be updated on their websites.