Happy Insurance TPA Services Pvt. Ltd vs Insurance Regulatory Development Authority of India on 21 December 2016

1. This appeal is filed by the appellant who is aggrieved by the order passed by the Member (Non-Life) of the Insurance Regulatory and Development Authority of India (‘IRDAI’ for short) on July 19, 2016. By the said order the application for renewal of license of Third Party Administrator (‘TPA’ for short) of the appellant has been rejected by the IRDAI for various reasons stated therein.

2. The appellant is a company established on January 18, 2011 with the objective of carrying on business of TPA for health insurance regulated by the IRDAI. The appellant received the license from the IRDAI for a period of three years from November 19, 2012. Before expiry of the license period, on October 10, 2015, the appellant made an application to the IRDAI for renewal of license along with relevant application form, fees etc. Subsequently, IRDAI sought clarifications vide its letter dated February 16, 2016 relating to the adequacy of working capital maintained by the company during financial year 2012-13, 2013-14 and 2014-15; changes in shareholding pattern, qualifications of the directors, filing of details relating to appointment of director etc. Further IRDAI vide its letter dated May 13, 2016 communicated certain deficiencies observed in the functioning of the appellant as TPA and show cause notice was issued as to why their application for renewal of registration shall not be rejected. On the basis of the additional details submitted by the appellant and after giving a chance of personal hearing on July 1, 2016 before the Member (Non-Life) the impugned order was passed by the IRDAI on July 19, 2016.

3. The impugned order considered the written and oral submissions made by the appellant. The impugned order dealt with issues relating to the validity of the medical qualification of the Director, changing shareholding pattern of the appellant company without IRDAI approval, timely submission of information relating to the changes in the board of directors, details in submission of annual reports, non-submission of documents relating to foreign/NRI/IPO shareholding and deficiencies in the appointment process of CEO and warned the appellant citing the relevant violations committed by the appellant in terms of the IRDAI Regulations.

4. The impugned order further considered the compliance of the appellant on one of the basic prudential norms which the every TPA has to satisfy; that is the working capital requirement. It was noted in the impugned order that for financial years 2012-13, 2013-14 and 2014-15 the availability of working capital was Rs. 92.12 lac, Rs. 72.34 lac and Rs. 32.84 lac respectively. As per the IRDAI Regulations relating to health services TPAs should continuously maintain a minimum working capital of Rs. 1 crore. In this regard, the appellant had submitted two sets of audited reports for the financial year 2015-16, both signed by the auditor on the same day i.e. on April 11, 2016. As per the first version of the audit report the availability of working capital was to the tune of Rs. 47.08 lac while by the second version of the audit report the available working capital has been revised to Rs. 147.08 lac. The explanation given by the appellant company for these variations that some book entries were inadvertently missed out in the first audit report was not found acceptable to the IRDAI.

5. Regulation 3(4) of IRDAI (TPA- Health Services) Regulations, 2001, is reproduced as under:

“At no point of time of its functioning the TPA shall have a working capital of less than Rs. 1 Crore; Explanation – For the purpose of this sub-regulation “working capital” means the difference between the aggregate of the current assets and current liabilities as on the date of reckoning.”

Thus, because of its inability to maintain the minimum working capital for three consecutive years and for submission of conflicting picture relating to the availability of working capital through two audit reports for the year 2015-16 the IRDAI rejected the application for renewal of the license of the appellant by the impugned order.

6. During the hearing of the appeal, the learned counsel for the appellant Mr. Prakash Shah argued that since the appellant is a new company and has been getting more and more orders, there has been some lapse in maintaining the minimum working capital requirement. However, in the year 2015-16 it has sufficient working capital of Rs. 1.47 crore as against the requirement of Rs. 1 crore. The submission of two sets of audit reports was on account of oversight in the first audit report which had to be corrected on being observed by the appellant company. The auditor has given an explanation relating to these variations which was not taken into account. Further another Chartered Accountant has certified that the company has a working capital to the tune of Rs. 1.38 crore as on August 29, 2016. Thus, both the revised audit report submitted by the auditor, and a certificate given by the another Chartered Accountant subsequently prove that the appellant company has more than Rs. 1 crore working capital during 2015-16.

7. The learned counsel for the respondent Mr. Shrinivas Bhave argued that the impugned order is sustainable on merit because of the various lapses committed by the appellant, particularly non-maintenance of adequate working capital which has been declining for three years. Further it is not disputed that the two sets of audit reports were given with the second one making corrections to only amplify the availability of working capital which is not supported by facts.

8. We do not find merit in the argument put forth by the counsel for the appellant. It is an undisputed fact that availability of working capital has been declining over the three year period of license and the explanation submitted for providing two sets of audit reports signed by the same auditor

on the same date is not convincing because, the audit report has a sanctity and the audit could not be issued in such causal manner. Moreover, violating the working capital requirements consistently for three years is a serious offence which deserves severe punishment.

9. For all the aforesaid reasons we find no merit in the appeal. Accordingly, the appeal is dismissed with no order as to costs. In view of the disposal of the appeal, Misc. Application for stay / interim relief does not survive and the same is disposed of accordingly.

Sd/- Justice J.P. Devadhar Presiding Officer

Sd/-

Jog Singh Member

Sd/- Dr. C.K.G. Nair Member 21.12.2016 Prepared & Compared By: Msb/PK