Rejection of application dated 16.02.2009 seeking grant of renewal of Compo, Sep 2010

INSURANCE REGULATORY AND DEVELOPMENT AJUTHORITY OF INDIA Title:Order Reference No.:IRDA/BRK/ORD/LC/147/09/2010 Date:03/09/2010 Rejection of application dated 16.02.2009 seeking grant of renewal of Composite Broking License Ref: IRDA/CB 131/03 1st September, 2010 The Principal Officer, M/s Willis India Insurance Brokers Pvt. Ltd., 111, Free Press House, 11th Floor, Free Press Journal Marg, Nariman Point, Mumbai-400 021 Sub: Rejection of application dated 16.02.2009 seeking grant of renewal of Composite Broking License 1. Willis India Insurance Brokers Pvt. Ltd. (hereinafter referred to as the `broker`) having its Registered Office at 111, Free Press House, 11th Floor, Free Press Journal Marg, Nariman Point, Mumbai-400 021, is a joint venture comprising of two entities, M/s. Baichand Amoluk Consultancy Services Pvt. Ltd. (BACSPL), promoter shareholder with a majority shareholding to the tune of 74% and M/s. Willis Europe B.V (foreign partner) with a shareholding to the tune of 26%. It was initially granted license no. 136 on 3rd April, 2003 for a period of three years in terms of IRDA (Insurance Brokers) Regulations, 2002 (hereinafter referred to as the `Regulations`) by the Insurance Regulatory and Development Authority (hereinafter referred to as the Authority) to act as a Composite Insurance Broker.

2. Upon the license becoming due for renewal on April 02, 2009, the broker submitted the application dated 16th February, 2009, before the Authority, in terms of Regulation 13 of the Regulations, seeking grant of renewal of its license. While considering the application, certain issues came to the notice of the Authority, which are detailed below: (i) The Authority received a complaint dated 02.05.08 from the broker which inter-alia alleged that another licensed broker; M/s Reliable Insurance Brokers Pvt. Ltd. (M/s. Reliable) had misused their name while securing placement of the risk of ‘Aircraft King Air B-200’ of the State Insurance and Provident Fund Department (General Insurance Fund), Govt. of Rajasthan, Jaipur, with ‘New India Assurance Co. Ltd. (ii) Another complaint dated 19.12.08 was lodged before the Authority by M/s. Export Credit Guarantee Corporation of India Ltd. (ECGC) inter-alia alleging that the majority shareholder of the broker; BACSPL had wrongfully withheld sums amounting to Rs. 5.08 Crores, due to them under the agreement of various reinsurance treaties placed through BACSPL with the foreign insurers.

(iii) The Principal Officer of the broker; Mr. Mitul Vora was stated to be involved in the settlement of the dispute with ECGC by representing BACPL as one of its Directors. (iv) The broker was stated to have failed to maintain the ‘insurance bank account’ properly.

3. In order to examine the veracity of these concerns and at the same time to ensure that the broker would continue to service the policyholders pending consideration of the same, the Authority extended the validity of the license of the broker for a period of one year upto 02.04.2010. 4. In the intervening period, the Authority called for information from the broker, ECGC, M/s. Reliable and BACSPL. Upon perusal of the information furnished on their behalf as also the material available on record, it appeared that the broker had indeed violated certain provisions of the Regulations and circular no. IRDA/BRO/36/Aug-04 dated 18th August, 2004 issued by the Authority. 5. Hence, the Authority issued a notice no. IRDA/CB131/03 dated 06.01.2010 upon the broker to show cause as to why action should not be initiated against them by the Authority for the stated violations and advised them to make their written submissions within a period of fourteen days from the date of receipt of the notice. 6. In response to the same, the broker furnished written submissions by their letter dated 15th January, 2010 and also requested for an opportunity of being heard before the Authority.

Subsequently, the Authority received a letter dated 08.02.2010 from the M/s. Willis International Holdings Ltd, Hongkong (WIHL) requesting information about the notice to show cause issued by the Authority to the broker, and stated that they had not been informed about the various violations stated to have been committed by Indian majority shareholder as also the complaints filed against them. However, BACSPL in their letter dated 17.02.2010 to the WIHL denied the allegations levelled against them. Thereafter, vide their letter dated 26.03.2010; the WIHL urged the Authority to protect their minority rights and in this context made their submissions and also sought for a personal hearing. They also stated that as the majority shareholder had not acted in good faith and had withheld vital information at the same time, they could not be held responsible for these violations on the part of the majority shareholder. 7. In view of the contradictory stand taken by the partners to the broker, the Authority forwarded the documents related to the case to the WIHL and granted a personal hearing to the broker on 24.05.2010.

Pursuant to the hearing, vide letter dated 26.05.2010, BACSPL submitted their replies to the allegations levelled against them along with supporting documents. 8. Upon considering the submissions made by the broker in writing and during the course of the personal hearing as also the facts and circumstances of the case including the material on record, the findings of the Authority are as under:- (i) The fact that BACSPL owed considerable amounts of money to an insurer; ECGC is a matter of record and not in dispute. It appears that pursuant to the legal notices issued by ECGC to BACSPL, ECGC is stated to have received an amount of Rs. 1.06 crores with Rs.5.08 crores remaining outstanding. It is also a matter of record that ECGC registered a criminal case against BACSPL on 31.12.2008 and also filed a civil suit against them in respect of the said issue on 28.04.2008. The fact that subsequently ECGC withdrew its complaint to the Authority against the broker is immaterial. What is significant is that these facts ought to have been disclosed by the broker to the Authority under Regulation 9(1) of the Regulations at the time of submission of the application seeking renewal of license but were not.

On the contrary, at the time of submission of the application seeking grant of renewal of license, a declaration to the effect that all questions had been truthfully and fully answered was made, which is materially incorrect. As per Regulation 9(1), while considering an application for grant of license, the Authority, shall take into account, all matters relevant to the carrying out of the functions by the insurance broker. In fact, these facts came to light only after the Authority received a complaint from ECGC in this regard. Non-disclosure of material information in the application made to the Regulator to obtain license as an intermediary has to be viewed seriously. As the broker failed to disclose material facts relating to the Indian major promoter of the broker at the time of submission of the application seeking grant of renewal of its license, he is guilty of the violation of clause 15 of the Code of Conduct as specified under regulation 21 read with regulation 34(1)(c) of the Regulations. (ii) Although, in the letter of the broker dated 14th July, 2006, it was contended that Mr. Mitul Vora is appointed as their Principal Officer to exclusively carry out only the functions of an insurance broker and Principal Officer within the meaning of the Regulations, from the documents/information submitted by ECGC with the Authority, it was noted that Mr. Mithul Vora was actively involved with BACSPL and was representing the majority shareholder as one of its Directors, in the settlement of the dispute with ECGC.

Although it has been contended that Mr. Mitul Vora has got involved to expedite the process of settlement so that the license of the broker can be expedited, it is clear that by representing the Indian and major promoter, the Principal Officer of the broker violated the requirements as specified in the provisions of the Regulations 2(1)(k)(iv) read with clause 15 of the code of conduct specified under Regulation 21 of the Regulations and circular no. IRDA/BRO/36/Aug-04 dated 18th August, 2004, which mandated the post of Principal Officer to be a full time post and hence an independent one. (iii) The broker stated to be involved in securing the placement of business of Aircraft B-200 belonging to the State Insurance and Provident Fund Department, Government of Rajasthan, with the local broker, M/s. Reliable. Although in their defence, it was submitted that the employees of the broker had fraudulently used their name for the said transaction, no indefensible evidence has been submitted to substantiate such a stand while the fact remains that this action resulted in the diversion of the brokerage initially credited in the account of M/s. Reliable.

Even assuming otherwise, the broker failed to ensure that its staff adheres to the code of conduct under Regulations 21 and also the requirements specified in Regulation 27 of the Regulations which inter alia specifies that every insurance broker shall ensure that a proper system of internal audit is practised in business and that his internal controls and systems are adequate for the size, nature and complexity of his business. It is thus apparent that the internal controls and systems of the broker are not adequate for the size, nature and complexity of the business undertaken by it. (iv) The broker was stated to have failed to maintain the `insurance bank account` properly as required to be provided in terms of the provisions of Regulation 23 of the Regulations, in that there existed a huge difference between the balances disclosed for the years 2007-08 and 2008-09 and the respective balances as reflected in the respective financial statements maintained by the broker. Thus the funds in the insurance bank account for payment to Re-insurer/Ceding Companies were being used to invest in fixed deposits which is a very serious concern and not a practise for the healthy regulation of the insurance sector and is against the interests of all policyholders.

It is also noted that the broker could not give any satisfactory defence in respect of this anomaly. 9. In terms of Regulation 13(3) of the Regulations, the application seeking renewal is required to be dealt with in the same manner as is specified under Regulation 9 of the Regulations. In terms of Regulation 9(2)(I) of the Regulations, the Authority while considering an application for grant of license is required to take into account all matters relevant to carrying out the functions by the broker and in particular whether the grant of license would be in the interest of the policyholders. 10. In view of the aforesaid findings in the context of the violations committed by the broker, having regard to the gravity of the same and the facts of the case which evidence that the broker has clearly failed to adhere to the applicable and relevant regulations while carrying out the activities as an insurance broker and has acted in a manner prejudicial to the interests of the policyholders, the Authority is of the view and hence the application of the broker, seeking grant of renewal of license that was earlier granted to them to carry out the functions as a Composite Insurance Broker, be rejected.

11. Accordingly, in exercise of the power vested upon the Authority under section 14 of the IRDA Act, 1999 read with Regulation 14(1) of the Regulations, the Authority is not inclined to accept the application filed by the broker seeking grant of renewal of license earlier granted to them to act as a Composite Broker. 12. If aggrieved by the aforesaid decision of the Authority, you may in terms of, Regulation 14(3) of the Regulations appeal to the Chairperson of the Authority within 30 days from the date of receipt of this communication.

Suresh Mathur Joint Director