Monday, November 21, 2011

Low Take-up Rate on D&O Insurance Policies

The Mint has a report today stating that “only 5-6% of publicly traded companies in India have taken D&O insurance policies, compared with nearly 95% of Fortune 500 companies”. This seems striking considering the fear that various corporate governance episodes in India have generated among directors and managements.
One of the key reasons for lack of D&O insurance policies is generally the expensive nature of such policies (with their hefty premia) given that a competitive market for such policies might be absent in India. But, the Mint report suggests that is not true and that rates of premia are in fact falling.
The other reason is usually the absence of a track record of successful legal action against directors and officers of the company where the threat perception may be low. The report suggests that this is determinative of the low D&O take-up rate in India. Not only are there limited substantive legal principles that allow shareholders (or other interested parties) to bring actions against directors and officers, but procedural delays and costs could make it uneconomical to bring them. Since directors’ and officers’ potential to be sued in other developed jurisdictions might be higher, that offers an explanation as to why Indian companies with international operations (or international listings) are more likely to avail of enhanced D&O insurance policies compared to other companies.
I recently had occasion to listen to a presentation on the D&O insurance market in China, and the position seems to mirror that of India on nearly all of these counts.


Anonymous said...

But are companies allowed to take D&O insurance for their directors in view of section 201 of the Companies Act?

V. Umakanth said...

@Anonymous. That appears to be an unresolved question in the Indian context. However, in other jurisdictions such as the UK (section 233 of the Companies Act 2006) and Singapore (section 172(2)(a) of the Companies Act, Cap. 50), there is a specific exception from similar provisions and they enable companies to take up D&O policies. Such a specific dispensation is conspicuous by its absence under the Indian Companies Act, 1956.