the matter of M/S. Athena Insurance & Reinsurance Brokers Pvt Ltd

INSURANCE REGULATORY AND DEVELOPMENT AJUTHORITY OF INDIA Title:Order Reference No.:IRDA/BRK/ORD/LC/161/07/2011 Date:13/07/2011 the matter of M/S. Athena Insurance & Reinsurance Brokers Pvt Ltd

IRDA/CB 179/03 ORDER OF THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY UNDER REGUALTION 14 OF IRDA (INSURANCE BROKERS) REGULATIONS, 2002

In the matter of M/S. Athena Insurance & Reinsurance Brokers Pvt Ltd Application dated 5th May, 2009 seeking grant of Renewal of Composite Broker License

1. ATHENA INSURANCE & REINSURANCE BROKERS PVT LTD (hereinafter referred to as the `Broker`) having its Registered Office at S.M.Banaji Bldg.No.1, Below State Bank of India, 49, Forjett Street, Mumbai-400 036 have been granted license by the Insurance Regulatory and Development Authority (hereinafter referred to as the ‘Authority’) to act as a Composite Broker, vide License No. 171 issued on 9.6.03 and renewed from 9.6.06 to 8.6.09 pursuant to the provisions of the IRDA (Insurance Brokers) Regulations, 2002. (hereinafter referred to as the `Regulations`)

The Broker is promoted by M/s. Athena Holdings (India) Pvt Ltd with 88.74 percent of shares and the remaining shares as on 31st March, 2009 are held by Mr. Utpal Kapadia (0.55%), Mrs. Neeta Kapadia (9.98%) and Mr. Apurva Shah (0.73%).

2. Upon the license becoming due for renewal on 8.6.09, the Broker submitted the application dated 5th May, 2009 before the Authority in terms of Regulation 13 of the Regulations, seeking grant of renewal of its license. During the processing of renewal application, the Authority received a copy of letter dated 18th May,

2009 addressed to the Broker by Mrs. Manju Bubna, alleging that 1, 40,000 shares of the Broker were not transferred to her. It is observed from the records that Mrs. Manju Bubna is erstwhile shareholder of the Broker and held 40,000 shares as on 9th March, 2005. The following facts were observed from the documents on record.

a) The gift deed was executed on 12th August, 2005 by Mrs. Neeta Utpal Kapadia by which she conveyed that her 1,40,000 shares of Athena Insurance & Reinsurance Brokers Pvt Ltd were given as gift in favour of Mrs. Manju Bubna. The share certificates were submitted and lodged by Mrs. Manju Bubna for transfer vide her letter dated 5th January, 2008. As the shares were not transferred in the name of donee, a notice dated 18th May, 2009 was served by Mrs. Manju Bubna on the Broker.

The Broker vide letter dated 2nd June, 2009 informed that Mr. Narendra Bubna who was the Chairman of M/s. Athena Holdings (India) Pvt Ltd was offered 33.33% of the shares and he requested the shares in favour of his wife, Mrs. Manju Bubna. The gift deed was made in favour of Mrs. Manju Bubna, however, verbally it was agreed that the shares would not be transferred until the paid up capital of the company was increased to the full value of authorized capital.

It is noted from the records that the above information on gift deed regarding transfer of shares was never brought to the notice of Authority by the broker and the matter came to light with receipt of the copy of Mrs. Manju Bubna letter dated 18th May, 2009.

b) Mr. Narendra Bubna vide letter dated 30th July, 2009 informed that a private criminal complaint dated 16th April, 2009 has been filed against Athena Insurance & Reinsurance Brokers Pvt. Ltd and one of the allegation was that the Broker willfully ignored the transfer of shares gifted to his wife.

c) Mr. Utpal Kapadia in the capacity of Managing Director of Athena Insurance & Reinsurance Brokers Pvt. Ltd filed a police complaint dated 28th July, 2009 against Mr. Narendra Bubna, alleging fraud and siphoning of huge amounts by him during his tenure as advisor and chairman of the company.

d) Mr. Narendra Bubna vide letter dated 9th October, 2009, lodged another complaint, making serious allegations about the working of the Broker and reiterating non transfer of shares in the name of his wife in terms of gift deeds.

3. The Authority vide letter dated 10th September, 2009 called for explanation and relevant information from the nd

Broker on the allegations of the complaint. The Broker vide reply dated 22 September, 2009 submitted the explanation.

4. The Authority, after careful examination of the above facts, the allegations of the complainant and reply of the Broker issued show cause notice dated, 3rd February, 2010, advising the Broker to show cause as to why proceedings should not be initiated against them in terms of the relevant provisions of Insurance Act, 1938 read with Broker Regulations and why appropriate action should not be imposed upon them for the irregularities committed by them.

(a) Non – submission of substantial disclosures at the time of submitting the application while seeking grant of renewal of composite broker license and even earlier with reference to:

i.) The execution of two separate gift deeds on 12.08.2005 regarding gifting of 1, 40,000 equity shares of the Broking company and 80,000 shares of the holding entity of Broking company to Mrs.Manju Bubna

This action attracts provisions of Regulation 34 (1) (c) of the Broker Regulations.

ii.) Affairs of the entity being run by Mr.Narendra Bubna including key decisions both financial and otherwise being taken by him instead of by the Principal Officer of the entity. This action amounts to a violation of circular no. IRDA/BRO/36/Aug-04 dated 18.08.2004, thereby making liable for action under the provisions of Regulation 34(1)(a) and 14(1) of the Broker Regulations.

(b) Payment of premiums on behalf of clients before their actual realization from them in contravention of said Regulations.

(c) Failure to maintain internal controls and systems and recognize and detect various irregularities; both financial and others, allegedly committed by Mr.Narendra Bunba, particularly in the matter of the lodging of a criminal complaint by the Broker against Mr.Narendra Bubna and Ors with the Senior Inspector of Police, Gamdevi Police Station, Mumbai. These actions amount to a violation of Regulation 27 of the Broker Regulations.

5. The Broker`s reply to the show cause vide its letter dated 17th February, 2010 has been received and examined. (a) i.) The Broker replied ``an intended gift of 1,40,000 equity shares of Athena Insurance & Reinsurance Brokers Pvt. Ltd. along with the intended gift of 80,000 equity shares of Athena Holdings (India) Pvt. Ltd. held by Mrs. Neeta Kapadia have been executed on 12.08.2005. The date of stamping on the transfer deed by the Registered Office was 31.08.2005 and the same should have been submitted to the company before 30.08.2006. The donee actually lodged the shares along with the transfer deeds on 18.01.2008. The company found that the transfer forms were invalid as they were out of date. As on date, the original shareholder of those shares under gift i.e., Mrs. Neeta Kapadia is still the shareholder in the records of the companies. Hence, at the time of the submission of application for renewal of our license in the year 2006 and also in the year 2009, the gift, as per the company’s records has not been effected and subsequent thereto the company did not include this information in the application for the renewal of the license.``

The Broker submitted that the company has not defaulted on non-submission of substantial disclosures and has not committed any violation of Regulation.

However, in their reply dated 22nd September, 2009, the Broker admitted that by oversight they did not intimate about the gift deed and they were to apply for approval before transferring the shares in their books of accounts and with Registrar of Companies. They could not transfer the shares as the share transfer forms were time barred and sine die. In light of the above admission by the Broker and on examining the replies, the Authority is of the view that the Broker had failed to disclose material facts in the application submitted for obtaining license. ii.) Regarding the affairs of the entity being run by Mr.Narendra Bubna including key decisions both financial and otherwise being taken by him instead of by the Principal Officer of the entity, the Broker explained ``it has been practice in the company to follow the procedures related to collective decision making by a team of officials comprising the managing director, principal officer and the finance head. However, without the tacit knowledge of the Principal Officer and the Managing Director, Mr. Narendra Bubna as Finance Head was taking financial decisions. No sooner, the acts of commission and omission came to the knowledge of the company Mr. Narendra Bubna’s services were terminated and recorded in the Board Minutes as recorded in Board Meeting held on 24th November, 2008 and an FIR lodged with the police for his nefarious activities.``

The company and the Principal Officer accept their responsibility for their lack of care in matters related to Mr. Narendra Bubna. The Broker, thus, violated provisions of circular no. IRDA/BRO/36/Aug-04 dated 18.08.2004.

(b) The Broker admitted that there had been instances of payments being made on behalf of the clients that too with the approval of the client as the risk were set to expire and there was no time for them to remit the premium to the insurer in time to keep the risk cover on. There is one instance where the Broker did not recover the premiums paid and the same was written off as bad debt.

The Payment of premium on behalf of clients is not in conformity with the functions of a Direct Broker specified under Reg. 3 of said regulations.

(c) The Broker explained ``the company had the internal control and systems in place. However, due to the criminal intent and designs of Mr. Narendra Bubna and the fact that he came from a well known reference completely blinded the company. Mr. Narendra Bubna took full advantage of the faith and confidence the company reposed in him and he clandestinely hatched a conspiracy to erode the finances of the company.``

The Broker accepts full responsibility for the lapses and requests the Authority to condone the same. It further informed that no sooner the criminal acts of Mr. Narendra Bubna came to knowledge; he was dismissed from the services and Broker lodged FIR dated 30th July, 2009 with Gamdevi Police Station. The Broker submitted that they thought it fit not to inform IRDA at this stage since his services had already been terminated on 24th November, 2008.

As recorded in para 2(b) & (c), Mr. Narendra Bubna informed that a private criminal complaint dated 16th April, 2009 has been filed against Athena Insurance & Reinsurance Brokers Pvt. Ltd and Mr. Utpal Kapadia, Managing Director of Athena Insurance & Reinsurance Brokers Pvt. Ltd filed a police complaint against Mr. Narendra Bubna on 28th July, 2009.

The above explanation of the Broker and complaints filed before the Gamdevi Police Station, Mumbai substantiate the lack of internal controls and systems in the company in contravention of Regulation 27 of said regulations.

6. Upon receipt of reply to the show cause notice dated 17th February, 2010 and examination thereof, the Broker has been granted personal hearing opportunity on 3rd August, 2010. The Broker was also given additional time to submit information on the status of complaints filed by Mr. Narendra Bubna and also compliant filed by the Broker against Mr. Narendra Bubna.

(a) In the personal hearing, the Broker submitted ``it was agreed between Mr. Narendra Bubna and the Management that unless we raise the share capital to Rs. 3 Crs, this shares will not be presented for transfer and IRDA`s permission will be sought before effecting the transfer.``

Further, it was stated that the shares have not been transferred and there is no possibility of transferring shares in future. The Broker prayed that the lapse has happened unintentionally and they may be pardoned.

The Broker vide letter dated 9th August, 2010 informed that complaint filed against Mr. Narendra Bubna is pending before the Gamdevi Police Station and vide letter dated 15th October, 2010 communicated that the criminal complaint filed by Mr. Narendra Bubna has been closed by Gamdevi Police Station.

(b) As regards the affairs of the entity being run by Mr. Narendra Bubna, instead of by the Principal Officer, the Broker submitted ``because of bad intentions of Mr. Narendra Bubna he did not inform some financial transactions to the Principal Officer and Managing Director and he has done the transactions without permission. We have already terminated his services and lodged criminal complaints against him``

The Broker prayed that this may be viewed sympathetically as they were kept in dark about the transactions and decisions taken by Mr. Narendra Bubna.

(c) On the charge of payment of premium on behalf of clients, the Broker replied ``the premium payment was made at the request of the client as a very special case, because the risk was expiring and providing urgent cover was necessary and client could not remit the payment to the insurance company in short time. Subsequently, we have recovered the amount in full from the client. ``

The Broker vide letter dated 16th September, 2010 submitted a certificate from chartered accountant certifying that as and from the renewal of their license collected all premiums which had been paid by them on behalf of their clients.

7. The Authority after careful examination of show cause notice, reply of the Broker, submissions made in personal hearing, information given thereafter and relevant material on record have come to the conclusion that M/S. Athena Insurance & Reinsurance Brokers Pvt Ltd has violated the following Regulations.

(a) The Broker failed to disclose material facts in the application submitted for renewal of composite broker licence and violated provisions of circular no. IRDA/BRO/36/Aug-04 dated 18.08.2004:

The Broker in renewal application dated 5th May, 2009 submitted a declaration to the effect that all questions have been truthfully and fully answered which is materially incorrect considering the non disclosure of pending dispute against the Broker by Mr. Narendra Bubna whose complaint is dated 16th April, 2009. The applicant failed to disclose material fact in the relevant column of renewal application and non disclosure of material information in the application made to the Regulator to obtain license as an intermediary is a matter of grave concern. The Broker by not furnishing the required information in column 5.1 of Form A under Reg 13 has breached the said provisions.

Even earlier, the Broker failed to inform the execution of gift deed on 12th August, 2005 by which 1,40,000 shares of Athena Insurance and Re-insurance Brokers Pvt Ltd were gifted in favour of Manju Bubna.

The Broker violated provisions of circular no. IRDA/BRO/36/Aug-04 dated 18.08.2004 as the affairs of the broker being run by Mr.Narendra Bubna including key decisions both financial and otherwise being taken by him instead of by the Principal Officer who is responsible for conducting the affairs of the broking company in a professional manner and as per the rules and regulations laid down / prescribed by the Authority.

(b)The Payment of premium on behalf of clients by the Broker is not in conformity with the functions of a Direct Broker specified under Reg. 3 of said regulations.

It is noticed that in one instance the Broker even did not recover the premiums paid on behalf of the client and the same was written off as bad debt. There is no mention in the certificate from chartered accountant dated 6th September, 2010 on premiums paid by the Broker on behalf of their clients prior to renewal of license.

(c) The Broker failed to ensure the requirements specified in Regulation 27:

Taking into consideration the contents of complaints and documents on record, the Authority is of the opinion that the internal controls and systems of the Broker are not adequate for the size, nature and complexity of business. The Broker, thus, violated the requirements of Regulation 27.

8. 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.

a. As per Regulation 9(1), the Authority while considering an application for grant of a licence takes into account, all matters relevant to the carrying out of the functions by the insurance broker. The Authority do not consider it fit to renew the license as the applicant company failed to disclose material facts in the application submitted for obtaining renewal of license regarding the case filed by Mr.Narendra Bubna with the police authorities and the execution of gift deed on transfer of shares to Mrs. Manju Bubna.

Whilst the promoters are involved in a dispute with Mr. Narendra Bubna and Mrs. Manju Bubna on transfer of shares issue and financial affairs of the company and violated the regulations, the Authority views the matter seriously and do not consider Athena insurance & Reinsurance Brokers Pvt. Ltd suitable to be granted renewal of insurance broker license.

b. The Authority while weighing the application in terms of Reg 9(2) (I) is of the opinion that the renewal of license is not in the interest of policyholders as the Broker has clearly failed to adhere to the applicable and relevant regulations while carrying out the activities as an insurance broker.

9. In view of the aforesaid violations committed by the Broker, the Authority is of the view that 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 Broker, be rejected.

10. 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 Broker Regulations, the Authority refuses to grant renewal of license to M/S. Athena Insurance & Reinsurance Brokers Pvt Ltd to act as a Composite Broker.

11. If aggrieved by the decision of the Authority, the Broker may in terms of, Regulation 14(3) of the Regulations apply within a period of thirty days from the date of receipt of this communication, to the Chairman of the Authority for a reconsideration of its decision.

Sd/- J. Hari Narayan Chairman

Date: 8th July, 2011 Place: Hyderabad

``True Copy Forwarded By Order’’

(Suresh Mathur) Senior Joint Director