Insurers smile as firms out to cover top brass’ liability
Jan 01 2014 , Mumbai
Rules under the new Act, which got presidential approval on August 31, are yet to framed.
The Act now makes shadow directors, chief executive officers and chief financial officers liable for any default with respect to any of its provisions. The earlier law held only managing directors and whole-time directors liable.
The new law has introduced a separate code of conduct for independent directors. The old law only specified the duties of independent directors in listed companies under clause 49 of the listing agreement. The new law defines not only the duties of key managerial persons but also specified penalties for breach of the law. In view of the high-profile cases in the past, the Act defines terms like fraud.
Sanjay Datta, chief of underwriting and claims at ICICI Lombard General Insurance, told Financial Chronicle, “With increased exposures for directors and officers, we believe that more companies, including unlisted companies, will think it prudent to buy D&O policies. Those who have already bought such policies may go in for higher policy limits.”
The new Act provides for the constitution of new regulatory bodies like the National Companies Law Tribunal and the National Financial Reporting Authority, according to him.
“The serious fraud investigation office, investigating cases against several companies, has been given legal status under the new Act. This will increase the regulatory pressure on the board and the key managers. This is one major area where the D&O policy can protect them against allegations of wrong-doing,” Datta said.
K K Mishra, CEO of Tata-AIG General Insurance, agreed: “The need for D&O cover will be felt by all good companies.”
A senior official of a public sector general insurer said, “We do expect more companies to buy D&O covers because of the stricter laws. Besides, recent incidents of top officials of some companies facing fraud and sexual harassment charges will make companies look at D&O policies.”
Sandeep Parekh, founder of Finsec Law Advisors, said, “The Act imposes a higher burden on directors if an IPO prospectus has wrong statements or information. With tougher checks on company boards and the increased role of shareholders, the risk for directors and officers has increased. This would increase the demand for D&O cover, he said.
A D&O policy provides cover against personal liability arising from wrongful acts of managers. Defence costs are covered and are payable in advance of final judgment. It also provides protection against claims on directors, officers and employees for actual or alleged breach of duty, neglect, wrong statements or errors.
Some of the specific exposures that make D&O insurance necessary are vulnerability to shareholder/stakeholder claims, sexual harassment, discrimination allegations and other employment practice violations, regulatory investigations, accounting irregularities, exposures relating to mergers and acquisitions, corporate governance requirements and compliance with various legal statutes.
Such a policy also offers an add-on cover against civil fines and penalties. The cover, however, is not available against criminal acts and consequent fines and penalties
According to experts, one of the most important changes brought is the increased power given to shareholders. Their approval will be required for major transactions.
The act brings in the concept of class action suits and defines the minimum parameters of a class. Such action can be brought against both a company and its auditors. With secretarial audits made mandatory and other audit provisions tightened, higher levels of scrutiny is ensured.
Only 98 sections of the Act have been notified. According to circular No 16/2013, the sections of the 1956 Act, which correspond to these 98 sections, will cease to have effect. But what these corresponding sections constitute has been left open to interpretation.
This is an especially tricky area for long-drawn processes such as restructurings. Though it has been specified that the National Companies Law Tribunal will take over the restructuring cases from the high courts once it becomes operational, it is not mentioned if this restructuring will take place as per the provisions of the new law or the old law.
“There are also certain definitions different from those used in accounting standards. This creates a grey area, which could put directors and officers of a company at risk with respect to compliance,” added Datta.