The move comes close on the heels of incident surrounding Asian Life Insurance, in which the company “misinterpreted” the regulator´s instruction and distributed dividend among promoters and public shareholders, breaching the conditions set by the Board.[break]
As per the new provision, the regulator will not endorse balance sheets of insurance companies even if they have minor flaws in it. In other words, if the regulator finds faults in balance sheets, the company will first have to make changes as directed by the Board and submit a fresh copy for approval.
Until now, the balance sheets, with minor faults, used to get the regulator´s approval, on condition that companies incorporate suggestions laid by the Board prior to submitting the reports at annual general meetings (AGM).
“This practice was totally based on trust,” a reliable source at the Board told Republica. “But after the Asian Life fiasco, we have realized we cannot trust companies.”
Last year, when Asian Life submitted its balance sheet, expressing intent to give away cash dividend, the Insurance Board had endorsed it.
“But we had asked the company not to distribute its profit until it gets another instruction and make changes to its balance sheet accordingly,” the source said.
“However, it failed to heed our instruction and presented the balance sheet at the AGM citing it had received permission from the Board to distribute dividend.”
The Board then partially halted business transaction of the company and allowed it to operate normally after 15 days.
Then around a month ago, the company again approached the regulator and sought its approval to distribute dividends. By this time, the Board had already come up with a directive, which barred all life insurance companies from distributing cash dividends unless they upped their paid-up capital to Rs 500 million. Since the company´s capital stood at Rs 360 million, the Board asked it to make decisions that do not violate regulator´s laws and instructions.
But the company assumed the IB´s reply as a green signal to distribute dividends. To clear the misunderstanding, the regulator clearly instructed the company to revert on its decision and stop dividend distribution process. But it was too late and company had already given away cash to its promoters and few public shareholders.
Currently, the company is barred from doing business.
“We believe our decision not to accept anything less than a clean balance sheet will put stop to this problem,” the source said.
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