Business Today Net Special

Of Reliance And Regulation

New India Assurance, a public sector insurance company, lost a premium worth Rs 83 crore by devising a special package for Reliance Industries (on the latter’s initiative), even though it was possible to cover the risks under the existing procedure. Auditguru M.V. Ramakrishnan analyses a CAG report on this.

By M.V.Ramakrishnan

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The twin objectives of statutory bodies set up by the government for regulating the affairs of vital service industries are to ensure that the institutions providing the services do get a fair price for their trouble and that they do not take undue advantage of their clients. The proper perspective of a regulatory body is overall, and not client-specific.

It is, therefore, very surprising when one finds a regulator intervening to let any particular client secure undue and substantial financial advantage at the expense of a service-provider. And when the former is a prominent industrial enterprise and the latter is a government agency, the scenario acquires intriguing connotations.

In 1999 Reliance Industries Ltd. (RIL) requested the New India Assurance Company Ltd. (NIA) to devise a comprehensive package policy (CPP) for its petrochemical plants and related onshore and offshore properties situated at Jamnagar, Hazira and Patalganga. NIA approached the Tarrif Advisory Committee (TAC) with such a proposal; saying that the petrochemical plants with integrated offshore risks could not be covered in the usual way under the existing tariff regulations.

The TAC gave a ruling in favour of the proposal, throwing the existing tariff to the winds, although the value of the offshore installations was only four per cent of the total value of the properties to be covered. NIA went ahead and issued a CPP, for the 'Indian rupee equivalent' of US $ 10818 (Rs. 46500 crore, at Rs. 43 per dollar) charging a premium of Rs 50 crore. The insured value of the offshore installations was only US $ 445 million.

The Comptroller and Auditor General of India (CAG) has made the following comment on this transaction in a recent audit report: - "All the risks covered under the CPP had earlier been covered under traditional petrochemical and engineering policies. The normal course would have been to cover the risks regulated by tariff under standard terms and conditions and issue separate policies for non-tariffed risk, if necessary...."

He points out that if the properties had been covered under the traditional tariff, the minimum premium would have been Rs. 103.50 crore, and not Rs. 50 crore charged. Thus, the government insurance company suffered a loss of Rs. 53.5 crore.

Similarly, the General Insurance Company (GIC) - another government enterprise-reinsured 80 per cent of the value with a consortium of foreign reinsurers, retaining only Rs. 10 crore as premium, though it could have retained Rs. 39.5 crore under its normal approved reinsurance programme. Thus GIC suffered a loss of Rs. 29.5 crore. The losses of NIA and GIC added upto Rs 83 crore.

Let us also hear what else Audit has to say on this affair:

The All-India Fire Tariff, which is applicable to petrochemical risks, specifically provides that an existing policy cannot be cancelled as to charge a lower premium than what was specified at the commencement of the policy. But NIA cancelled the existing policies of RIL when issuing the CPP, and refunded the premium already paid on them.

Section 64 of the Insurance Act forbids any discrimination between clients. According to the Audit report, "...The circumstances of the case clearly indicated that the comprehensive package policy was conceived, devised and implemented at the insurance of a single client.... Thus, the TAC, NIA and GIC went out of the way to favour a particular client by exempting insurance of its projects from the purview of tariff and by issuing the CPP at lower rates".

NIA and GIC subsequently allowed the same terms and conditions to other major petrochemical companies like Indian Oil Corporation, Bharat Petroleum Corporation and Cochin Refineries. But says the CAG: ".... Extension of similar concessions to a few other mega-clients at a later date was only the result of the wrong precedent set by the TAC in this case, as their risks were not considered earlier for similar treatment."

On the role of the Tariff Advisory Committee, the CAG observes: "Though the TAC was acting within its power to decide on the tariff regime, being a statutory body, it cannot claim immunity from legislative scrutiny of its actions and decisions".

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