based on the

(i)            Show Cause Notice (hereinafter referred to as “SCN”) dated 28^th April, 2014 issued vide Ref:464.1/F&A/12/RDL/2012-13/29/April2014 to M/s Exide Life Insurance Company Limited, erstwhile ING Vysya Life Insurance Co. Ltd. (hereinafter referred to as “the insurer”) on the payment made towards infrastructure facilities made to Corporate Agent ING Vysya Bank during the FY 2012-13.

(ii)          The Insurer’s letter EXL/REGL/47/2013-14 dated 2^nd June, 2014.

(iii)         Submissions of the insurer during Personal Hearing dated 2^nd March, 2015

(iv)         Submissions of the insurer during the Personal Hearing held again on 30^th August, 2018

Background:

1.            The Insurer vide letter IVL/EGL/032/2013-14 dated 20^th May, 2013 had filed their returns for FY 2012-13 in accordance with Circular No. IRDA /F&A /CIR /DATA /066 /03 /2012 dated 2^nd March, 2012. On perusal of the return, it was observed that the insurer had paid towards Infrastructure facility charges of A 28.96 crores (including ST) to Corporate Agent ING Vysya Bank (now merged into Kotak Mahindra Bank Ltd) (to be referred to as IVB herein after).

2.            IRDA vide letter 464.1/1/F&A/12/RDL/2012-12/110/2013-14 dated 7th August, 2013 called for explanation from the insurer on violations of Clause 21 of circular 017/IRDA/Circular/CA Guidelines/2005 dated 14^th July 2005.

3.            The insurer vide its letter IVL/REGL/80/2013-14 dated 23^rd August, 2013 and IVL/REGL/85/2013-14 dated 13^th September, 2013 submitted their response as under:

a.    The payout to IVB was on account of a new agreement with IVB for optimizing infrastructure usage for effectively executing its training, product roll out and marketing campaigns, besides significantly improving brand visibility and awareness.

b.    The new agreement was based on the usage of IVB Branch infrastructure facilities like projector, printer, telephone, meeting rooms etc., for conducting training/product launches and displaying Insurer’s advertisements and materials on ad-hoc basis. There is no specific bifurcation for each service and based on usage of approximate 400 branch facilities out of 590+ branches of IVB each month, a fixed amount of INR 2.168 crs plus service tax has been agreed and paid to IVB

c.    The payout to IVB under said infrastructure facilities agreement was an independent agreement and not connected to the insurance business.

d.    Payments made were not linked to insurance business/premium received and therefore may be considered outside the purview of clause 21 of the Corporate Agents Guidelines.

4.            The IRDAI circular dated 14^th July 2005 allows to share only the expenses of co-branded sales literature with the corporate agents apart from the agency commission and such expense, should be reasonable and should not in any way be linked with the success in sale or premium earned by the Corporate Agent. Therefore, it was felt by IRDAI that the payment to IVB does not fall within the prescribed payments under Clause 21 of the above quoted circular and hence amounts to non-compliance of the directions issued by the Authority under the provisions of the Insurance Act, 1938. Consequently, an SCN was issued by IRDAI to the insurer vide letter dated 28^th April 2014 in this regard.

Charge:

5.            The Insurer has paid A 28.96 crores (including ST) towards Infrastructure facility charges to IVB in violation of Clause 21 of IRDAI circular 017/IRDA/Circular/CA Guidelines/2005 dated 14^th July 2005.

Reply to the Charge:

6.            Exide Life vide its letter dated 2^nd June, 2014 reiterated their submissions and in addition have indicated that the payout to IVB under the infrastructure facilities agreement is an independent agreement on a fixed payout basis and not connected to the volume of life insurance business. Also they have further indicated that it is cost effective to arrange for such facilities on adhoc/temporary basis at various locations. They have also indicated that the tie up with IVB for such purposes is an independent arm’s length contract with no correlation whatsoever to the obligations under the Corporate Agency Agreement. They also sought for a personal hearing.

Personal Hearing:

7.            A personal hearing was given by Shri R.K. Nair the then Member (F&I) on 2^nd March, 2015. However, as no order was passed before Shri Nair demitted his office, another opportunity for personal hearing was given to the insurer by the undersigned given again on 30^th August, 2018 at the Head Office of IRDAI, Hyderabad. Shri Kshitij Jain, CEO & MD, Shri Anil Kumar C, CFO and Smt. Arpita Sen, CCO of the insurer were present. On behalf of the Authority, Shri A Ramana Rao, GM (F&A-Life), Sri G.R. Surya Kumar, GM (EA to Chairman), and Smt. B. Padmaja, DGM (F&A-Life) were also present.

8.            During the hearing the insurer reiterated their submissions and indicated that

a.    ……the payment was towards usage of the infrastructure facilities of the Bank on a pan India basis at fixed cost of approximately A 50,000/- per bank branch per month for about 400 branches. It is payment for the use of infrastructure facilities of the bank by the employees of Exide Life.

b.    …... On an average about one or two officials of the Insurer were present in 400 plus branches of IVB. The existing infrastructure of IVB bank branches was used. This arrangement was viewed to be commercially less expensive than entering into multiple individual agreements across India for availing such infrastructure facilities.

c.    …the insurer has Corporate agency arrangements with 33 banks (Co-operative banks), but they do not have arrangements for infrastructure facilities sharing with any of those banks since no such pan India infrastructure facilities were available for use

d.    …after the year 2014, there are no such payments to IVB (now Kotak Mahindra Bank Ltd.) as the bank is not a Corporate Agent with the Insurer any more.

Consideration of the Response:

9.            It is observed that IRDAI levied penalty vide order dated 30/07/2012 for similar type of violation i.e. payment of other than the permitted agency commission to IVB in financial years 2009-10 and 2010-11 for advertisements primarily aimed at building the brand image of the insurer and towards setting up the sales kiosks, organizing the road shows and customer awareness programs at different Bank locations.

10.             As per Clause 21 of Corporate Agency Guidelines, “Insurer shall not pay any amount other than the permitted agency commission, whether as administration charge or reimbursement of expenses or profit commission or in any other form to the corporate agent, except for reasonable expenses towards co-branding sales literature”. It is established that Insurer paid to IVB, which was a corporate agent of the insurer as well as its shareholder, Rs. 28.96 crore towards the infra structure facilities as submitted under para 3 (b) above. The same amount was over and above the eligible commission payable.

11.         The insurer continued to pay to their Corporate Agent in FY 2012-13 a fixed amount under a different head viz., usage of infra structure facilities of IVB Branches on ad-hoc basis which is in violation of Clause 21 of the Corporate Agency Guidelines.

Decision:

12. The payouts of A 28.96 Cr made by the insurer towards the “Infrastructure facility charges” to its Corporate Agent during the FY 2012-13 are in violation of the said provisions of Clause 21 of Corporate Agency Guidelines. Therefore, a penalty of A 2 lakh (Rupees Two Lakh) is being imposed on the insurer, by invoking Section 102 of Insurance Act, 1938 for violating the provisions of Clause 21 of Corporate Agency Guidelines read with Section 40 A of Insurance Act, 1938 in the FY 2012-13.

13. Further, this Order may be placed before the Audit Committee of the Board of Exide Life and also in the Board Meeting of the insurer, so that the Board can take note of the violation and take preventive steps to avoid such violations in future. The Authority may be provided with copies of the minutes of those meetings.

14. The penalty amount of A 2 lakh (Rupees Two Lakh only) shall be remitted by the insurer by debiting the Shareholders’ Account within a period of 21 days from the date of issuance of this Order through NEFT/RTGS (details for which will be communicated separately). An intimation of remittance may be sent to Shri A. Ramana Rao, General Manager (F&A-Life) at the Insurance Regulatory and Development Authority of India, Survey No.115/1, Financial District, Nanakramguda, Hyderabad 500032, email id finance.life@irda.gov.in

15. If the insurer feels aggrieved by any of the decisions in this Order, an appeal may be preferred to the Securities Appellate Tribunal as per Section 110 of the Insurance Act, 1938.

Place : Hyderabad

Date : 14 November 2018

CHAIRMAN