India: IRDAI Reiterates ‘Policyholders First' – The Sahara Precedent

In a landmark move, the Insurance Regulatory and Development Authority of India (IRDAI) appointed an administrator to manage the affairs of Sahara India Life Insurance Company Limited with immediate effect. Such a move is unprecedented and re-enforces the fact that the regulator would not hesitate in taking unprecedented action and exercise all powers available to it under the Insurance Act 1938 (Act) to foster its mission 'to protect the interests of policy holders'. 

On 12 June 2017, the IRDAI exercised its powers under Section 52A of the Act by appointing an administrator to manage the affairs of Sahara India Life Insurance Company Limited with immediate effect. In its order, it was mentioned that the IRDAI had reasons to believe that the concerned insurer had acted in a manner likely to be prejudicial to the interests of holders of life insurance policies issued by the concerned insurer. On the same date, the IRDAI also issued a public notice, addressing the policy holders of the concerned insurer as well, in which it stated that the administrator will endeavour to ensure that policy holders continue to be serviced and that the affairs of the concerned insurer are managed as smoothly as feasible. In order to enable addressing of questions from policy holders, the IRDAI provided a freshly created email address to which questions could be sent to the administrator.

Also on the same date, the IRDAI issued a detailed order in which it set out the primary concerns raised to the concerned insurer, review of the responses received, the lack of providing satisfactory responses to the IRDAI in relation to certain follow-up questions, the deterioration of the financial position of the insurer (and the fact that the accounts did not reflect a true and fair view of its financial position) and the admission of the insurer's representatives in a personal hearing with the IRDAI that the management of the insurer was in chaos.

In this article, we have examined the regulatory framework  in relation to the exercise by the IRDAI of such power.

Section 52A – Power of last resort

Section 52A of the Act empowers the IRDAI to appoint an administrator to manage the affairs of a life insurance company, under the directions and control of the IRDAI, if the IRDAI has reason to believe that such life insurer is carrying on its business in a manner which is likely to be prejudicial to the interest of the holders of life insurance policies.

The current language of Section 52A was introduced under the Insurance Laws (Amendment) Act 2015 (Amendment). Earlier, the IRDAI's powers were limited to preparing a report after allowing the concerned life insurer an opportunity to be heard, and submitting such report to the Central Government, which could review the report and decide to appoint an administrator. Hence, with the enactment of the Amendment, the IRDAI's powers have been expanded and it is now the sole decision-maker in terms of appointment and control of an administrator for a life insurance company. The Amendment has granted finality to the decision of the IRDAI in terms of appointment of an administrator as Section 52E of the Act prohibits a court from examining the IRDAI's decision in this respect. 

Wide powers available to the Administrator

In addition to its ability to submit the aforementioned report, Section 52C empowers an administrator to cancel or amend (either unconditionally or subject to conditions imposed by the administrator) any agreement executed by the concerned insurer, subject to certain conditions.

Further, an administrator may issue a written order to any person prohibiting them from transferring or otherwise disposing of any property which, in the opinion of the administrator, would be liable for attachment under restoration or compensation proceedings instituted under Section 106 of the Act (which involves matters such as misapplication of money by the insurance company's promoters or diminution of the life insurance fund due to contravention of the Act).

An administrator's functioning is given further impetus by Section 52F of the Act, which penalises any director or officer of the concerned insurer, or any other person who retains an insurer's property or fails to deliver to the administrator any books of accounts, registers or other documents in their custody which relate to the business and management of the concerned insurer.

Administrator's Report

An administrator is mandated to carry out the business of the concerned insurer with the 'greatest economy compatible with efficiency', and, pursuant to Sections 52B of the Act, prepare a report to the IRDAI in which the administrator advises which of the following courses of action is recommended in relation to the concerned life insurance company, depending on which method is most advantageous to the insurer's holders of life insurance policies:

  1. transfer of insurance business: an administrator may recommend transfer the insurance business of the concerned life insurance company to another life insurer;
  2. business as usual: an administrator may recommend allowing the business of the concerned life insurance company to continue as it was earlier, continuing covering insurance policies as per their original sums with bonus or for reduced amounts;
  3. winding up: an administrator may recommend winding up the concerned life insurance company in accordance with Sections 53 to 61 of the Act read with the relevant provisions of the Companies Act 2013 and applicable rules framed thereunder; or
  4. discretionary path: an administrator may recommend any other course of action in relation to the concerned life insurer's business.

IRDAI's Binding Order

Upon receiving and reviewing the administrator's report, the IRDAI is empowered to take any action which it may think fit in order to promote the interest of life insurance policy holders. Section 52B(3) clarifies that the IRDAI's order is binding and that it will override anything contained in the concerned insurer's memorandum of association and articles of association. This implies that that shareholders which have rights in relation to the management of the concerned insurer would effectively lose any such rights enshrined in the insurer's articles of association once an administrator is appointed and the IRDAI issues its order in this respect.

Immunity to IRDAI and appointed administrator

Pursuant to Section 52G of the Act, the IRDAI and the administrator it appoints are granted statutory immunity from any suit or other legal action for actions taken in good faith or intended to be in relation to their respective statutory powers in relation to administration of an insurance company. 

Implications of the Precedent

The 12 June 2017 order highlights that the regulator is prepared to take swift action in order to achieve one of its most important objectives – protecting the interest of policy holders. This decision will reinforce the faith of policy holders in the regulatory framework around the insurance sector. Policy holders, including persons considering purchasing life insurance policies, will now have increased confidence in purchasing life insurance coverage as they will now have the knowledge that the insurance sector regulator will proactively protect their interests if the insurance company's management acts against their interests. This may lead to more individuals purchasing life insurance policies, and an overall deepening of the life insurance market in India.

The fact that the IRDAI provided a detailed order in this case, after providing several opportunities to be heard, will provide additional comfort (in terms of transparency and precedent) to existing insurance companies and to potential insurance sector investors in the sense that the IRDAI has provided a detailed insight on its thinking process and approach, as well as the severity of a situation which would lead the IRDAI to take the drastic (but necessary) step to appoint an administrator for a life insurance company.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

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