1

Judgment reserved on 02.5.2014Judgment delivered on 29.5.2014

WRIT PETITION NO.8879 (M/B) OF 2013

Dr. Virendra Pal Kapoor vs. Union of India & ors

Hon'ble Sunil Ambwani, J.

Hon'ble D.K. Upadhyaya, J.

1. We have heard Shri Dhruv Kumar, learned counsel appearing

for the petitioner. The office of Assistant Solicitor General of India,

Lucknow Bench of Allahabad High Court has accepted notice on

behalf of Union of India. Mohd. Altaf Mansoor appears for Insurance

Regulatory and Development Authority-respondent No. 2, Shri

Sudeep Seth has accepted notice on behalf of State Bank of India-

respondent no.3. Shri Sachin Garg appears for SBI Life Insurance

Company Limited-respondent no.4.

2. Dr. Virendra Pal Kapoor-the petitioner is a senior citizen aged

72 years. He retired as a Scientist of National Botanic Research

Institute and is settled at Lucknow. He invested Rs.50,000/- in the

year 2007 in SBI Life - “UNIT PLUS II – Single”, a Unit Linked

Product offered by SBI Life Insurance Company Limited with an

option of a limited term of five years (from 9.1.2007 to 9.1.2012), on

the basic sum assured for life with risk cover at 625% of

Rs.3,12,500/-, with a choice of investment in growth fund (100%).

The petitioner survived the term of the policy of five years. On its

maturity he was paid only Rs.248/- as a balance in the fund, on

which the policy was terminated.

3. By this writ petition the petitioner has prayed for directions to

declare Circular No.032/IRDA/Act/Dec-2005 dated 21.12.2005 as

ultra vires the Insurance Act, 1938 so far as it relates to the deduction

2

of charges from the policy holders fund; to issue a writ of mandamus

commanding the State Bank of India-respondent no.3 not to allow

use of Logo, Branch Name i.e. SBI, their Banking Branches, their

employees etc. for the purpose of selling or soliciting the insurance

business of the respondent no.4-SBI Life Insurance Company

Limited. He has also prayed for a direction in the nature of

mandamus commanding the Insurance Regulatory and Development

Authority (IRDA) to ensure that the commission is not paid to the

insurance agents and intermediaries etc. from the investment

component under ULIP policies and further a direction to State Bank

of India not to give publicity to the fact that it does not underwrite

the risk or act as an insurer as provided under Clause (g) of

Regulation 9 of Licensing to Corporate Agents Regulations, 2002.

The petitioner has also prayed for a writ of mandamus commanding

the IRDA to redress the grievance of the petitioner as contained in

petitioner's representation dated 8.2.2012.

4. It is submitted by Shri Dhruv Kumar, appearing for the

petitioner that the petitioner was misled by SBI Insurance Company

Limited, of which the policies are sold by the employees of the State

Bank of India, in the premises of State Bank of India to opt for the

Unit Linked Product – SBI Life - “UNIT PLUS II – Single” which

also offered an option of investment in the mutual fund to be

managed by the so-called experts of the company and for which they

charge the fund administrative charges and fund management

charges from the subscribers.

5. In the counter affidavit of Shri Rohit Kumar, A.G.M.

(Personnel Banking-I),LHO, State Bank of India, Lucknow it is

stated that the State Bank of India is a statutory corporation formed

under the State Bank of India Act, 1955. It derives its name from

Section 3 (1) of the State Bank of India Act, 1955. Its logo/emblem is

3

duly registered under the Copyright Act, 1957. The State Bank Life

Insurance Company Limited (SBI Life) is a subsidiary of State Bank

of India. It is a joint venture between State Bank of India and BNP

Paribas, Cardiff, England. The State Bank of India owns 76% of the

total capital and BNP Paribas, Cardiff has the remaining 24%. The

SBI has the authority to carry out life insurance business in terms of

the guidelines issued by IRDA, the licensing authority. The

Government of India holds 62.3130% of the issued equity shares in

State Bank of India. The holding of State Bank of India in SBI Life

being 76%, the indirect holding of Central Government, in SBI life is

less than 50%, as such, the opposite party no.4 does not come within

the purview of the term State under Article 12 of Constitution of

India, 1950. In the composition of board of directors of SBI Life,

four directors are from State Bank of India; two from BNP Paribas

and four independent directors. The State Bank of India does not

have majority of directors in the board of directors of SBI Life and

that the Government of India does not have any direct or pervasive

control over the affairs of SBI Life.

6. It is stated that in terms of Regulation 4 of Insurance

Regulatory and Development Authority (Licensing of Corporate

Agents) Regulations, 2002 the State Bank of India entered into an

agreement with SBI Life on 19.2.2005, in terms of which the SBI

expressed its willingness to be appointed as a corporate agent of SBI

Life for the purposes of soliciting and procuring life insurance

business and selling of life insurance products. As per Clause 1.1.3 of

the agreement which defines “Corporate Insurance Executive” to

mean one or more of its officers or employees so designated by SBI,

who possesses the requisite qualification and practical training and

has passed such an examination as required under the regulations.

Clause 1.1.6 of the agreement defines an insurance agent to mean a

4

person soliciting or procuring life insurance business for SBI life

whether or not employed by SBI and as defined in Section 40 (1A) of

the Insurance Act, 1938. Clause-2 of the agreement specifies that the

SBI has accepted the appointment as a corporate agent of SBI Life

to procure and solicit life insurance business for and on its behalf

with professional diligence through all or some of SBI branches and

to promote the sale and distribution of the life insurance policies

being sold by SBI Life. The work performed by SBI as a corporate

agent is subject to the provision of IRDA, Regulations/Insurance Act,

1938 and to the mutual agreement executed between the parties.

7. Clause 5.2 of the agreement provides that SBI can market and

attend to the queries of the customers and render efficient customer

service required from a distribution agent without risk participation

to the policy holders. Clause 5.6 provides that SBI cannot publish or

circulate any advertisement, pamphlet, or any other printed material

concerning the business of SBI Life without obtaining its prior

written consent.

8. Clause 8 of the agreement provides that SBI Life would be

responsible for bearing all the expenses relating to designing,

printing of proposal/subscription forms, cost of training courses of its

own staff and travel expenses of trainers of of answering opposite

party. Clause 11 of the agreement provides that SBI Life shall be

solely responsible for any claim made by any policy holder and

further provides that the SBI Life undertakes to indemnify and hold

the answering opposite party, harmless from any loss, damage,

claims, liabilities, charges, cost or expenses that may arise or be

caused by reason of the SBI acting as a corporate agent of SBI Life

and to defend any suit, action, claim, litigation or other proceeding.

The other terms of the agreement are not relevant for the purpose of

this case except Schedule-1 of the agreement which provides for the

5

usage guidelines of the SBI trade mark and logo; Schedule-2 which

provides for details of the trade marks which are under the exclusive

usage and ownership of answering opposite party; Schedule-3, which

provides for logo of SBI to be used for SBI Life and Schedule-4

which provides for royalty fee to be paid to SBI by SBI Life for

using the SBI name and logo, which will be 0.20% of the total

income or 2% of profit after tax, whichever is higher.

9. In para-13 of the counter affidavit filed on behalf of SBI it is

stated that Unit Linked Life Insurance Products are different from the

traditional insurance products, and are subject to risk factors. The

premium paid in unit linked life insurance policies are subject to

investment risks associated with capital markets and the net annual

values of the units may go up or down based on the performance of

funds and factors influencing the capital market and the policy holder

is responsible for his/her decisions. The SBI Life issued the policy to

the petitioner for an insurance cover of Rs.3,12,500/- at 625% of the

investment, for a period of five years from 9.1.2007 to 9.1.2012. The

policy clearly indicated that the unit linked life insurance product is

only a name of the unit linked life insurance contract and does not in

any way indicate the quality of the contract, its future prospects for

returns. As per the instructions of the petitioner the entire insurance

premium after deducting the initial expenses will be invested in the

growth funds amongst other available funds. The growth funds has a

risk profile of medium to high, meaning thereby that in case of a

successful investment the returns can be very high but in the

eventuality of unsuccessful investment, the chances of sustaining a

loss are also high. The insurance cover granted on the life of the

petitioner provided for expenses and charges like mortality charges

for covering the insurance on the life of the insured to be recovered

from the funds like cancelling the appropriate number of units from

6

the funds value. The deductions were made as per the terms and

conditions of the policy for providing continuous risk cover for the

entire term of policy. In the present case the age of the petitioner was

64 and half years on the date of proposal and insurance cover was for

a sum of Rs.3,12,500/-, and thus for the petitioner as an elderly

person, the mortality charge were higher than those of young person

and with an option for a life cover of 625% of the single premium of

Rs.50,000/- which comes to Rs.3,12,500/- the cover benefit being the

insurance cover and the returns purely incidental, the petitioner

cannot complain of receiving less return under the policy.

10. It is submitted on behalf of the SBI and SBI Life that the

policy documents issued to the petitioner contained all the options

including fund management charges, administration charges and

mortality charges etc. The policy provided for “free look period” of

15 days from the receipt of the policy documents to review the terms

and conditions of the policy documents to review the terms and

conditions of the policy where the insured disagreed to any of the

terms and conditions he had an option to return the policy giving

reasons. In that case he would be entitled for refund of the amount in

the manner prescribed. The petitioner did not return the policy

documents to the insurer. If he was not satisfied he could have raised

objections or expressed his reservations in that regard. The policy did

not offer any guaranteed return and the benefits available under the

policy and the charges to be levied were clearly stated in the terms

and conditions of the policy.

11. It is stated by the State Bank of India that the SBI Life had

intimated the petitioner vide its letter dated 12.9.2011, 18.10.2011,

16.11.2011 and 13.12.2012, about the queries made in respect of the

policy, its execution and operations. Besides having the maturity

value the petitioner had also agreed to the valuable risk cover for the

7

premium paid by him under the risk and maturity of the policy and

his contention and allegations are baseless.

12. In the counter affidavit of Shri Nehal Ahmad, Head Processing

Centre, S.B.I. Life Insurance Company Ltd, Lucknow almost a

similar stand has been taken as that of SBI. It is stated that SBI Life

is a company incorporated under the Companies Act. It is not a State

within the meaning of Article 12 of Constitution of India and thus no

writ petition under Article 226 of Constitution of India lies against it.

The SBI Life is not a administrative or statutory public authority to

be amenable to the writ jurisdiction of the Court. The State Bank of

India holds 76%, and BNP Assurance holds 24% of the share capital

in the respondent-company. Since the Central Government holds

62.3130% of the issued equity shares in SBI, and SBI holds only

76% of the share in SBI Life Insurance Co. Ltd, the indirect holding

of the Central Government is less than 50%. Hence the SBI Life is

not a State. In the board of directors of SBI Life there are four

directors from the State Bank of India; two directors are from BNP

Assurance and four independent directors. The Central Government

does not have deep or pervasive control in the affairs of SBI Life. On

the terms and conditions of the policy the stand taken by SBI Life is

the same as that of SBI. It is further stated in paras 13, 17, 18 and 19

as follows:-.

“13. That as per Schedule II, Point No.4 Creation of units, Clause no. (j) of policy bearing no.25003820001, 'NAV of the units of each fund may fluctuate depending on the factors and forces affecting the markets from time to time and may also be affected by changes in the prevalent rates of interest. (k) There is no guaranteed return on this product.”

17. That the policy bearing no.25003820001 matured on 09.01.2012. As per the clause no.d, maturity benefit of the Schedule I of the policy,

8

(i) In the event that the Life Assured survives up to the date of maturity hereinbefore stated, the maturity benefit will become payable. The maturity benefit is equal to the fund value (based on the NAV prevailing on the date of maturity).

(ii) At maturity, all future rights and benefits (including rider benefits) under this Policy will automatically cease.”

18. The answering respondent had intimated the petitioner vide letters dated 12.9.2011, 18.10.2011, 16.11.2011 and 13.12.2011 respectively about maturity of the policy and had requested him to submit the necessary documents for processing the maturity payment.

19. That the maturity benefit payable under the policy is equal to the fund value prevailing on the date of maturity. The calculation of maturity value under the policy as on the date of maturity i.e. 9.1.2013 is as given below:-

Policy no.25003820001

20. That besides the maturity value, the petitioner has also availed the valuable risk cover till maturity of the policy, for the single premium paid by him under the policy. Thus the allegations raised by the petitioner are baseless and does not have the sanction of law. The complaint is therefore illegal and unjust and is not maintainable.

21. That a contract has to be interpreted as per the terms and conditions of the document evidencing the contract. The policy bond is the evidence of the contract of insurance and both the insurer and the insured are bound by the terms and conditions of the contract. The maturity value is payable as per the terms and conditions of the policy and there is no contractual obligation on the part of the opposite parties to pay any other amount.”

13. In substance both SBI and SBI Life have defended the prayers

of the writ petition on the ground that SBI Life is not State within the

meaning of Article 12 of Constitution of India, and is not amenable

to the jurisdiction of the High Court under Article 226 of

Constitution of India. The SBI Life is not the instrumentality of the

State. The insurance policy subscribed by the petitioner was linked

with the investment made by the petitioner carrying a risk in

investment portfolio to be born by the policy holder. He was aware

9

of the terms and conditions of the policy and was informed about the

details and deductions of charges at the time of subscription with a

15 days' free look period. The petitioner had subscribed to the policy

with open eyes and which provided for various charges including the

fund administrative charges, fund management charges and the

mortality charges. Since the petitioner entered into the insurance term

of five years at the age of 64 and half years the risk factor associated

with the policy at such advanced stage increasing every year from 65

years to 71 years, provide for deductions of the charges on monthly

basis from the NAV of the fund reducing the fund to the balance of

the investment which was paid to the petitioner.

14. Shri Dhruv Kumar, learned counsel for the petitioner submits

that the petitioner is a retired Scientist from NBRI, Lucknow. He has

lost the entire investment of Rs.50,000/- which he had saved for his

retired life. The State Bank of India as a statutory corporation has a

controlling interest in SBI Life. It is not correct to state that with

Government of India holding 62.3130% of the issued equity shares in

State Bank of India the holding of State Bank of India in SBI Life is

less than 50% and thus it will not come within the purview of the

term 'State' under Article 12 of Constitution of India. With more than

50% of issued equity shares of SBI Life subscribed by State Bank of

India which statutory corporation, the SBI Life is a State amenable to

writ jurisdiction of the High Court.

15. It is submitted that the SBI Life has created a magic in which

the investment of a senior citizen of Rs.50,000/- after five years was

reduced to final payment of Rs.248/- thereby playing fraud with him

and millions of similarly placed citizens specially senior citizens in

robbing them of the savings of their life. There were two options for

minimum sum assured for which the approval of IRDA was sought

by SBI Life. The IRDA in its letter dated 21.6.2006 had categorically

10

objected that two options for minimum sum assured cannot be given.

As a regulatory authority it had directed the insurer to re-examine the

terms of his policy regarding the minimum sum assured on the lines

given in the Unit Linked Policy Guidelines of IRDA dated

21.12.2005. The SBI Life in its letter dated 23.6.2006 had assured

that it had modified the product namely 'SBI Life -Unit Plus II

Single', according to Guidelines dated 21.12.2005 and Circular dated

26.5.2006. The undertaking was given by the MD & CEO as well as

Appointed Actuary of SBI Life.

16. It is submitted that despite clear directions of IRDA and the

assurance given by SBI Life, it did not amend the two minimum sum

assured options. During the course of argument of the writ petition

this anomaly came to light on which learned counsel appearing for

SBI Life stated that SBI Life had again submitted the revised

application under 'file and use guidelines' with minimum two sum

insured options to the prospective customer. Despite categorical

undertaking given by SBI Life vide their letter dated 23.6.2005 at

page-49 of the Supplementary Counter Affidavit filed by SBI Life,

the two options were not removed. The SBI Life has violated the

guidelines of IRDA dated 21.12.2005 and the letter of IRDA dated

21.6.2006. It cannot, therefore, be said to be a bonafide approval of

the product in tune of the guidelines having statutory force. The

contract is thus illegal and has been rendered void ab-initio.

17. Shri Dhruv Kumar submits that the petitioner was hoodwinked

by the management of SBI Life in subscribing to higher risk in the

policy without any caution given in the policy form of the danger of

dissipation of the entire amount in the resultant higher amount

payable as mortality charges. The consent of the petitioner to a

higher insurance risk was taken without disclosing the hidden

agenda. The proposal form contained an option of a request to tick in

11

the boxes for either 125% or 625% SP of the sum assured. The form

did not disclose that in case of option of 625% SP, the mortality

charges at a increasing rate beginning from Rs.27 per thousand

would be charged to be deducted on monthly basis reducing the

amount from NAV of the fund and thereby reducing the amount

invested drastically every month. The proposal form was couched in

a manner which concealed the malafide intention avoiding

mentioning 'minimum basic sum assured 125% of single premium'.

The SBI being a statutory corporation was under a statutory

obligation in accordance with the guidelines of IRDA to design the

proposal mentioning minimum sum assured 125% of single premium

as per guidelines dated 21.12.2005 notified by IRDA.

18. It is stated by Shri Dhruv Kumar that the insurance contracts

are to be entered with utmost bonafide intention. These contracts

should not have any hidden purpose or charges. Instead of clear

declaration in the proposal form that in case the insurer opts for

higher sum assured over and above 125% of the single premium, the

mortality charges deducted from NAV every month would be at a

higher rate. A simple option of ticking two options in the box were

given with no caution nor did the agent, who is an employee of the

SBI, explained that with an option of 625% of single premium,

which was not authorised by IRDA in its guidelines dated

21.12.2005, the entire sum at the end of five years will be reduced to

a negligible amount.

19. Shri Dhruv Kumar states that the unit linked insurance policy

in breach of the guidelines dated 21.12.2005 notified by IRDA was

in gross violation of 'Point of Sale' Regulation 3 (2) & (3) of IRDA

(Protection of Policyholders) Regulation 2002, which provides that

material information must enable the prospect to decide on the best

cover that would be in his/her interest and must be given

12

dispassionate advice. Regulation 3 (2) and (3) of IRDA (Protection

of Policyholders) Regulation 2002 made in exercise of powers

conferred by clause (zc) of sub-section (2) of Section 114A of

Insurance Act, 1938 read with Sections 14 and 26 of the Insurance

Regulatory and Development Authority Act, 1999, are quoted as

below:-

“(2) An insurer or its agent or other intermediary shall provide all material information in respect of a proposed cover to the propose to enable the prospect to decide on the best cover that would be in his or her interest.

(3) Where the prospect depends upon the advice of the insurer or agent or an insurance intermediary, such a person must advise the prospect dispassionately.”

20. Shri Dhruv Kumar submits that the object of leading the

petition higher sum assured was with the preconceived motive to

deduct higher mortality charges to the financial benefit of SBI Life.

The mortality table used for the purpose of IAL (Indian Assured

Life) 1994-96 prescribed by the IRDA as bench mark was loaded by

25% by the SBI Life so as to allow higher mortality charges leading

to higher profit at the cost of policyholder. The standard mortality

table as prescribed by the IRDA was based on mortality experience

of policyholders in the period 1994 to 1996. The same should have

been adjusted for improvement i.e. the multiplier factor should have

been less than 1 (for example 0.75 instead of 1.25), if at all

adjustments were required particularly when the product was being

priced in 2006, when the life expectancy was substantially improved

than the levels in 1994-96. There was no logic behind loading the

standard mortality rates by 25% which allowed SBI Life to deduct

large amount of mortality charge leading to larger profits to itself.

The product was a 'non-participating' product under which no profit

of the insurer can be shared with the policyholder and which proves

13

the complicity. The Executive Director of IRDA at the time of

approval raised this point and asked for justification. The justification

given was that same method i.e. loading by 1.25 has been used by

SBI earlier for other products. It is submitted that this lame

justification was given to IRDA with motive to deceive the

policyholders. The relevant query and the answer is reproduced as

below:-

10 Item No.14 (a) please justify the mortality rates which are 125% of IAL 1994-96

• Existing “Unit Plus -Single” product assumes 125% of IAL 1994-96 mortality, which was approved by IRDA. We would like to continue with the same practice.

• We are selling this product through all our distribution channels and to general public without any restrictions.

• Our non-medical limits are also very high viz. Rs.10 lacs and Rs.15 lacs for general public and employees respectively.

(Pg. no.2 of letter dated 30/06/2006 of the list of documents filed by the SBI-Life)

21. Shri Dhruv Kumar submits that the policyholders were not

informed and were taken of surprise at the end of the policy with

unilateral amendments in the policy and IRDA advice vide letter

dated 7.5.2009. The SBI Life had realised that with the higher

charges, namely administrative charges, the fund management

charges and the mortality charges the size of the fund value of the

investor was sinking day by day and that under the terms of the

policy the policyholder was entitled to refund with the fund value at

shrunk to Rs.10,000/- by terminating the policy. Since the SBI Life

did not want to lose hold of even that minimum amount of

Rs.10,000/-, it conspired to get the permission from IRDA to delete

sub-clause 4 (h) of not only of the petitioner's SBI Life – Unit Plus II

Single policy but three other policies namely SBI Life Unit Plus II

Regular; SBI Life Horizon II and SBI Life Horizon II Pension by

14

virtue of Automatic Policy Termination Condition vide letter dated

7.5.2009. The IRDA in its letter dated 7.5.2009 directed the SBI Life

to offer switch over option to all policy holders. Relevant part of the

letter dated 7.5.2009 of IRDA provided “2. Submission of copy of the

communication to the existing policy holders regarding the proposed

change, offering them the option to switch over to new clause.”.

22. It is submitted that no such switch over offer was given to the

petitioner, which is evident in the letter dated 23.10.2009, alleged to

have been sent to the petitioner. In para-11 of the writ petition the

petitioner has denied receipt of any such communication and in any

case this communication did not give option of switch over. The term

of the policy in sub-clause 4 (h) to terminate the policy when the

fund value is shrunk to Rs.10,000/- with an option under the

directions issued by the IRDA to switch over was not given to the

petitioner. In fact this unilateral amendment carried out with a

malafide intention had virtually escaped the attention of IRDA,

which has a statutory duty to protect the investor's interest. The

IRDA found it sufficient that a switch over option is given to all

policyholders in place of the term of termination of policy when the

policy value is reduced to Rs.10,000/- and this resulted into robbing

the petitioner of the benefits of the policyholders at least to a

minimum of Rs.10,000/-. The result of deleting sub-clause 4 (h),

reduced the value of the policy to a petty amount of Rs.248/-, at the

end of the term of the policy.

23. Shri Dhruv Kumar further submits that the charges, namely

administrative charge, fund management charge, switch over charge,

mortality charge are the hidden charges, which are not properly

explained to the policyholders. It is by virtue of these charges the

SBI Life despite being a company owned and controlled by SBI, is

15

making huge profits at the cost of policyholders. The Insurance Act,

1938 does not allow any charges from the policyholders fund. The

IRDA, however, has issued guidelines without any safety

regulations. The deductions of the charges are in complete violation

of the IRDA policy dated 21.12.2005, which was not followed by

SBI Life.

24. These charges even otherwise from petitioner's fund are

approximately 20% from the total fund. The charges are thus

exorbitant and are detrimental to the interest of the policyholders.

25. Shri Dhruv Kumar has also assailed the payment of

commission on investment portion, which is not in tune of Section

40-A of the Insurance Act, 1938. In the policy in question the units

are the combination of (a) investment and (b) insurance risk. The

investment portion of the fund does not cover the risk of life,

however, insurance portion covers the risk of life. Section 40-A of

the Act, 1938 permits commission on the policy of life insurance.

The insurer does not consider the investment portion as premium. In

fact the insurance company paid service tax on the premium portion

covering the life of the assured. It adopts two different yardsticks for

paying service tax liability which they compute on payable insurance

premium only, but when it comes to payment of commission to the

agent, the insurance company considers both insurance premium and

investment portion as one entity. Section 40A of the Insurance Act

provides as follows:-

“40-A Limitation of expenditure on commission.—

(1) No person shall pay or contract to pay to an insurance agent, and no insurance agent shall receive or contract to receive by way of commission or remuneration in any form in respect of any policy of life insurance issued in India by an insurer after the 31st day of December, 1950, and effected through an insurance agent, an amount exceeding—

(a) where the policy grants an immediate annuity or a deferred annuity in

16

consideration of a single premium, or where only one premium is payable on the policy, two per cent. of that premium,

(b) where the policy grants a deferred annuity in consideration of more than one premium, seven and a half per cent. of the first year’s premium, and two per cent. of each renewal premium, payable on the policy, and

(c) in any other case, thirty-five per cent. of the first year’s premium seven and a half per cent. of the second and third year’s renewal premium and thereafter five per cent. of each renewal premium payable on the policy:

Provided that in a case referred to in clause (c) an insurer, during the first ten years of his business, may pay to an insurance agent, and an insurance agent may receive from such an insurer, forty per cent. of the first year’s premium payable on the policy:

Provided further that in a case referred to in clause (c), where the rate of commission payable on the first year’s premium is equal to or less than twenty-one per cent. thereof, and the rate on the fourth and fifth years’ premiums does not exceed six per cent. thereof, the Life Insurance Corporation of India may pay to an insurance agent, and the insurance agent may receive from it, commission on the sixth and subsequent years’ renewal premiums payable on the policy at a rate not exceeding six per cent. of each renewal premium.”

26. In the present case 35% commission on the first year's

premium permitted by the Act when paid as commission on the

investment portfolio is not in terms of Section 40-A of the Insurance

Act. It is submitted that Section 40-A of the Insurance Act, 1938 also

prohibits payment of infrastructure/administrative expenses. The SBI

Life is regularly paying infrastructure/administrative expenses to

State Bank of India, which is violative of Section 40-A of the

Insurance Act, 1938. It is evident from the agreement between the

State Bank of India and SBI Life annexed to the counter affidavit.

Clause-3 of the agreement provides for commission about other

considerations for selling the policies at the rates as may be mutually

agreed. In addition the SBI Life under the agreement also pays other

considerations against the insurance policies sold by SBI at such

rates as may be mutually agreed. They are siphoning of the

17

policyholders' fund illegally in contravention to Section 40-A of the

Insurance Act, 1938.

27. Shri Dhruv Kumar submits that the inspection team of IRDA

had pointed out payment of illegal administrative expenses to State

Bank of India to the extent of Rs.204 crores on which the IRDA had

imposed a penalty of Rs.70 crores as provided under Section 102 (b)

of the Insurance Act, 1938. The amount was given back and adjusted

in favour of the policyholders.

28. It is submitted that if the argument advanced by SBI Life and

SBI is accepted, the SBI Life under the agreement with SBI is

misleading the customers on the reputation of the SBI by using name

and logo of SBI creating a perception in the minds of general public

that the SBI is the insurer and this leads a common unwary customer

to fall into the trap of the policy, which contradicts the terms and

conditions imposed of IRDA. The SBI as a statutory corporation

entered into the agreement with SBI Life into a dangerous arena of

claim, with the investment of investors and thereby cornering the

profits to its directors, who are the directors in SBI Life. They are

earning fat salaries and profits of policyholders on a

misrepresentation made that the SBI is the insurer. It is false to say

that the SBI does not have a controlling interest in SBI Life. The

management of the statutory corporation should not be allowed to

mislead the customers and to earn in illegal manner cornering the

benefits to itself. The penalties imposed by IRDA and SBI Life

should have allowed the directors of SBI in SBI Life to resign long

ago. They have, however, continued under the cover of the logo and

printed name of SBI to attract general public. The present case is a

classic example where the investment of petitioner of Rs.50,000/- has

been reduced to Rs.248/- at the end of five years' terms and the entire

amount has been appropriated despite the increase in NAV of the

18

investment by deducting illegal charges, which have been pocketed

by SBI Life and its Directors. They have played fraud on

policyholders and have attracted criminal liability of cheating and

fraud which cannot be avoided and hidden behind the corporate

cover.

29. It is submitted that the SBI to disassociate itself from SBI Life

and instead the Chairman of State Bank of India is the Chairman of

SBI Life and as per shareholders' agreement, the SBI has retained the

right to appoint 4 Directors including the Managing Director and

Chief Executive Officer of SBI Life, giving a perception to the

general public that the State Bank of India is the insurer. These facts

are clearly violative of Regulation 9 (1) (g) of IRDA (Licencing of

Corporate Agents) Regulations, 2002.

30. Shri Dhruv Kumar states that the petitioner as a senior citizen

has been agitating on the reduction of his investment of Rs.50,000/-

to a petty amount of Rs.248/- under the cover of the agreement

entered into between SBI and SBI Life and deduction of hidden

charges in complete violation of IRDA Regulations. The 'Utmost-

Good Faith' which is a fundamental principle of insurance has been

violated. He submits that this Court must take cognizance of the

fraud played by the Chairman and Managing Director of SBI and to

direct for initiation of criminal proceedings against him.

31. It is submitted that the prime duty of IRDA is to protect the

interest of policyholders in the matter relating to terms and

conditions of the policy and claim settlement as provided in Section

14 (2) (b) of IRDA Act 1999. It is not carrying out statutory duties

and responsibilities and is allowing the insurance company under the

logo of SBI Life to play fraud on the innocent persons who fall in the

trap.

32. In United India Insurance Company Limited vs. Manubhai

19

Dharmasinhbhai Gajera and others (2008) 10 SCC 404 it was

held that the IRDA is entitled to redress the grievance of the

individual. The petitioner had lodged a complaint with IRDA with

the hope that it will take cognizance of the case and analyse as to

how the investment of Rs.50,000/- was reduced to Rs.248/- within

five years. The IRDA, however, submitted a routine and mechanical

reply ignoring the gravity of violation of its own unit link guideline

dated 221.12.2005 by the SBI Life and its repercussions on millions

of policyholders. The regulator has abdicated its regulatory powers

and has rather become facilitator in unethical practices of insurance

companies, giving up its prime duty to work as watchdog on the

activities of the insurance companies. The matter must be referred by

this Court to the Ministry of Corporate Affairs to conduct an enquiry

by the serious fraud office to bring back the confidence of the masses

on the insurance policies issued by the insurance companies in India.

33. It is submitted that the IRDA must be directed to have a close

look on all policies launched by SBI Life specially SBI Life

Dhanraksha (three time costlier than its own policy with similar

cover) to trap its home loan borrowers. Million of persons are falling

into the trap without full disclosure and the protection of IRDA. The

IRDA had found SBI and SBI Life guilty of mis-selling as no

informed choice was given to the members of these groups of

insurance policies as envisaged under Regulation 3 (2) and (3) of

IRDA (Protection of Policyholders' Interest) Regulation 2002 and

had directed the SBI Life to refund Rs.275 crores to 7.5 lacs home

loan borrowers by its letter dated 11.3.2014.

34. Shri Sachin Garg, appearing for SBI Life has filed a written

note explaining the magic with which SBI Life reduced the

investment of Rs.50,000/-, of which the NAV in the growth fund has

risen from 17.1500 on 9.1.2007, to 19.2396 on 9.1. 2012, to a petty

20

amount of Rs.248/-. He has tried to explain the reduction of the

amount to the higher risk cover by the unit linked insurance policy by

deducting monthly mortality charges payable by a person at the age

of 64 and 1/2 years progressively upto the age of 70 years from

Rs.24.40 per thousand sum assured per annum on the sum at risk

namely Rs. 312500/- minus the invest of Rs.50000/- with addition of

service tax @ 12.36% in the first year. He submits that the terms of

the policy are strictly in accordance with the approval given by

IRDA and that the policy was not put into force until such approval

was received. He submits that point no.4 in Schedule II of the

proposal clearly provided that NAV of the unit of each fund may

fluctuate depending on the factors and was not affecting the market

from time to time and may also be affected by the changes in the

prevalent rate of interest. Further there is no guaranteed return on the

product. He submits that the petitioner had clearly opted for 625% of

the single premium. There was no hidden charges. If the petitioner

was not satisfied he could have returned the policy in the free look

period of 15 days and for deleting the condition of terminating the

policy when the amount falls below Rs.10,000/- with switch over

option. The intimation was given in time in writing to the petitioner.

35. We have given our anxious consideration to the facts brought

before us in which a senior citizen having invested Rs.50,000/- in a

unit linked product with an option of growth has lost his entire

money except Rs. 248/-; in five years despite the rise of NAV of his

investment on growth fund on account of charges including the

mortality charges which were not explained to the petitioner. He had

time and again and repeatedly asked and has also averred in the writ

petition that at the time of persuasion to subscribe to the policy

despite his repeated requests he was never informed that even if the

NAV rises his entire amount invested in mutual fund will be

21

consumed by the charges amongst which the mortality charge is so

high that there was absolutely no chance of getting any amount

higher than the amount invested.

36. The SBI Life with common Chairman and CEO, with SBI and

with directors nominated by the Chairman and CEO, the SBI has a

controlling interest of more than 50% in SBI Life. The SBI with 76%

of the issued and paid up capital in SBI Life, has a direct deep and

pervasive control over the management of SBI Life. It is difficult to

understand as to how the SBI Life is defending itself not to be the

State, when the SBI has a control of 76% in its shareholding and in

turn the Government of India holds 62.3130% of the issued equity

shares in SBI. No formula in mathematics can reduce the contract of

SBI in SBI Life to less than 50%. Once a statutory corporation holds

more than 50% paid up shares in a Company, such Company

becomes a subsidiary company of the statutory corporation and

would fall within the meaning of State under Article 12 of

Constitution of India. The argument raised by learned counsel

appearing for the SBI and SBI Life in this regard is not worthy of

consideration.

37. We have considered the submissions and gone through the

provisions of the Insurance Act, 1938; the IRDA (Protection of

Policyholders Interest) Regulations, 2002 and find that the terms and

conditions of the policy providing for two options for minimum sum

assured did not have approval of IRDA. The IRDA had directed the

insurer to re-examine the minimum sum assured on the lines given in

unit linked policy guidelines dated 21.12.2005. Despite clear

directions of IRDA the SBI Life did not amend the option. The

explanation given by SBI Life to the file and use guidelines relating

to the sum assured was not accepted by IRDA. The SBI Life had thus

clearly violated the guidelines of IRDA dated 21.12.2005 and had

22

acted in contravention with the letter of IRDA dated 21.6.2006.

38. We find considerable force in the submission of learned

counsel appearing for the petitioner, that since the top management

of the SBI Life had already decided to obtain consent on 625% sum

assured of single premium basis, targeting senior citizens the any

modification would have taken away the advantage of deducting

mortality charges at a higher rate depriving SBI Life of the benefit of

profits. The entire exercise was to hoodwink the investors. Learned

counsel appearing for the SBI Life took considerable time to explain

that the policy document was an open document, which should have

been read by the petitioner. He, however, could not satisfactorily

reply as to whether the terms and conditions of the policy were

properly explained by the insurance agent, who was an employee of

the SBI to the petition. The acceptance of option at 625% SP at the

entry level at 64 years, was required to be explained to the petitioner.

In case the calculations were explained, he would certainly not have

opted for a policy which would ultimately lead to completely wiped

out his investment. No prudent person, if he was explained with the

consequence of deduction of mortality charges at 625% risk, would

have subscribed to the policy, which in any case even if the NAV had

risen, would not give any return at all.

39. The petitioner had invested Rs.50,000/- in a mutual fund

option of 'growth'. Even if the NAV had fallen to 50%, he was

entitled to return of the sum after deducting the insurance premium.

The deductions made of the mortality charges at the risk factor,

which was not explained to the petitioner on monthly basis by

reducing the amount of NAV was clearly in violation of IRDA

Guidelines dated 21.12.2005.

40. The petitioner had agreed with a clear term of termination of

the policy when the value of investment had fallen to Rs.10,000/-. It

23

was a safeguard which was absolutely essential to protect the

investment. The IRDA appears to have completely overlooked the

pitfalls of the details of the clause proposed by SBI Life in the

middle of the terms of the policy, with an option of switch over. The

SBI Life never advertised the deletion of sub-clause-4 (h) of the

policy in the newspapers. The letters written individually had a high

risk of distribution at the end. In the present case the petitioner had

clearly denied that he received any such letter or an option for switch

over informing him that his investment had fallen to Rs.10,000/-.

We may observe again that no prudent person, even if he had taken

the risk of investment in mutual fund with an insurance policy may

not have switched over, if he had been communicated an option

when his investment fell below Rs.10,000/-. Clause provided for

termination of the policy, if the investment fell below Rs.10,000/-. It

could not have been changed unilaterally even on the advice of

IRDA. The written consent of the policy holder was required for

deletion of the clause. Mere information sent by post is not sufficient

to enforce a clause, which protects the policy holder.

41. The IRDA, has in this case failed to examine the terms of the

policy critically. The acceptance of the letter dated 30.6.2006 written

by SBI Life to IRDA did not have an informed approval. The IRDA

does not appear to have examined the effect of the revision of the

second option of the increased risk cover by 625%, on the investment

with deduction of high rate of mortality charges. The acceptance

letter dated 30.6.2006 by IRDA without adverting to the reasons

given to retain the two options clause was in breach of its statutory

duty to protect the insured. Further the IRDA completely failed in

exercise of its statutory duty in allowing the unilateral amendments

in the policy vide its letter dated 7.5.2009 on a mere advice of a

switch over option to all the policy holders. Such unilateral

24

amendment on the advice of IRDA was not permissible until the

consent of each policy-holder was obtained. The IRDA is a

regulatory body. It represents the policyholders interests and not his

rights. An advice of IRDA could not be the basis of change in the

policy, which is a contract unless written consent of policyholder was

obtained. The IRDA failed to carry out its statutory duties in

allowing such unilateral change by mere information without

insisting upon written consent of the policy holder as a condition for

deletion of sub clause-4 (h) of the policy.

42. Once this matter in which the investment of a senior citizen of

Rs.50,000/- has been reduced to Rs.248/- in five years, by a

Corporation, which is owned and controlled by the Statutory

Corporation, acting in breach of the IRDA Regulations has come to

our notice, we find it appropriate to issue a direction to the IRDA to

critically examine each and every policy of the SBI Life. If it finds

that the SBI Life, which has suffered penalties in the past, for its

defaults has acted in breach of its guidelines it would be appropriate

for it to direct the SBI Life to discontinue its policies and to wind up

its business. The Central Government will do well to ensure that the

investors are not cheated in a manner as in the present case, in which

the entire investment of the senior citizen has been lost on the pretext

of the policy being in tune with IRDA guidelines. The 'Serious

Fraud', Department of Ministry of Corporate Affairs must examine

these policies and unlawful gains made by the Company and its

Directors including the Directors of SBI, in the Company, by

cheating the policyholders on the pretext that its policies are in

compliance with IRDA regulations.

43. In United India Insurance Company Limited vs. Manubhai

Dharmasinhbhai Gajera and others (2008) 10 SCC 404 the

Supreme Court, explaining the statutory objects and purposes of the

25

Insurance Regulatory and Development Authority Act 1999 and

Insurance Regulatory and Development Authority (Termination of

Policyholders Interest) Regulations 2002, with reference to

Regulations 4, 5, 7 and 11, held that roles of the private player and

State are different. A private player may not be bound to comply

with the constitutional requirements of the equality clause but the

appellant insurers (United India Insurance Company Limited and

other National Insurance Companies) are. There exists a distinction

between private player in the field of insurance and a public sector

insurance company. Whereas a private player in the field is only

bound by the statutory regulations operating in the field, the public

sector insurance companies are also bound by the directions issued

by General Insurance Corporation as also the Central Government.

These directions cannot be ignored. The object of the IRDA is to

regulate the insurance companies to offer a fair deal and all the terms

and conditions of their offer must be transparent. There should not be

any hidden agenda. They should not take recourse to “ticking

contract”. When the terms of a new product or revised product

require the approval of IRDA, prima facie, the same would mean that

they are fair and reasonable. The action on the part of the authorities

in such case will not be questionable. Regulations, guidelines and

circulars are binding on the insurance companies.

44. The Supreme Court further held that a balance has to be struck

between the human rights as contained in the Universal Declaration

of Human Rights as also the right of a State and others who perform

public utility provisions like insurance companies. Ordinarily a

contract of insurance services would not come within the purview of

the public utility services as defined under, the Legal Services

Authorities Act, 1987, as amended in 2002, says so in terms of

Section 22(b) or 22(c) thereof creating new volumes which would

26

easily be accessible to the service recipient. The Supreme Court

directed the IRDA to issue appropriate directions keeping in view the

Universal Declaration of Human Rights and particularly in view of

the fact that the Government of India does not provide for any social

security by way of compulsory (health) insurance. Unlike the

provisions of the Motor Vehicles Act, 1988 such compulsory (health)

insurance does not find a place in any statute book. The IRDA must,

therefore, lay down clear guidelines by way of the Regulations which

would be applicable to all the players in the field.

45. In LIC of India and another vs. Consumer Education &

Research Centre and others (1995) 5 SCC 482 the Supreme Court

distinguished the contracts in relations to the State, its

instrumentality, public authorities or those acts bear insignia of

public element, action to public duty or obligation are enjoined in a

manner i.e. fair, just and equitable, after taking objectively all the

relevant options into consideration and in a manner that is

reasonable, relevant and germane to effectuate the purpose for public

good and in general public interest and it must not take any irrelevant

or irrational factors into consideration or arbitrary in its decision.

Duty to act fairly is part of fair procedure envisaged under Articles

14 and 21. Every activity of the public authority or those under

public duty or obligation must be informed by reason and guided by

the public interest. It is the exercise of the public power or action

hedged with public element becomes open to challenge. If it is shown

that the exercise of the power is arbitrary unjust and unfair, it should

be no answer for the State its instrumentality, public authority or

person whose acts have the insignia of public element to say that

their actions are in the field of private law and they are free to

prescribe any conditions or limitations in their actions as private

citizens, simplicitor, do in the field of private law.

27

46. The Supreme Court held that the standard forms of contracts

are 'Contracts of Adhesion' of Government or its instrumentality with

private persons on the basis of its standard terms and conditions, if

unreasonable, unfair and irrational is open to judicial review. The

action of public authority must be in public interest and should not be

arbitrary, unjust and unfair. Such actions are amenable to judicial

review.

47. In the present case, we find that the petitioner as a senior

citizen entered into a contract with SBI Life in the premises of SBI

under its banner and logo and was misled by an agent of SBI acting

under an agreement between the SBI and SBI Life, in leading the

petitioner to enter into a contract which had both the investment and

insurance aspects. The contract from the very beginning considering

the age of the petitioner with twin options which was clearly

prohibited by the regulations of IRDA misled the petitioner into

signing a standard form 'Adhesian Contract' purportedly approved by

IRDA, without explaining its contents which led the petitioner from

its very inception to trap in which at the end of five years, taking into

consideration the administrative charges, the fund management

charges and mortality charges, the amount of investment, even if

prudently invested in the best option of 'Growth' reduced from

Rs.50,000/- to a negligible amount of Rs.248/-. The clause of

termination of the contract when the investment was reduced to

Rs.10,000/- was cleverly deleted, with only an information given to

the investors/insured persons, without verifying the receipt of the

communications and obtaining any written consent from the

policyholder. The entire act was preconceived and premeditated to

dilute the entire investment by imposing a high rate of charges in the

name of mortality charges. The contract was clearly unconscionable

with its clauses purportedly in tune with IRDA guidelines, leading

28

the policyholder with a total loss of his investment. The petitioner

was, in the name of free look over policy and a switch over option,

never explained, warned or cautioned that his investment will fall

dangerously to the level where it will almost vanish at the end of the

term of five years. The petitioner was handed over only Rs.248/-

without adequate explanation for which he had run from pillar to post

and filed this writ petition after seeking replies under RTI Act, in

which the counter affidavit also did not explain the terms and

conditions which magically took away his entire investment. It was

only during the course of extended hearing that the counsel appearing

for SBI Life initially trying hiding behind the cloak of a private

contract, tried to unsuccessfully explain that the terms and conditions

had tacit approval of IRDA and that the clause of termination of

contract, if total amount falls below Rs.10,000/- was removed with

the approval of IRDA by giving an information of which the proof of

receipt was never produced.

48. On the aforesaid facts and circumstances we are constrained to

hold that the SBI Life is a subsidiary of SBI and that “SBI Life Unit

Plus II – Single” a unit linked product on a standard form of contract

did not have the approval of IRDA to its twin options in which the

higher option reduced the entire investment of a senior citizen with

high rate of mortality charges. It was an unconscionable contract and

was thus arbitrary, illegal and void document. It did not bind the

petitioner.

49. On the aforesaid discussion we hold that the terms of the 'SBI

Life Unit Plus II – Single' policy to be unconscionable and declare

the contract of policy to be illegal and void. The SBI Life will return

the original amount of Rs.50,000/- to the petitioner within a month.

The Insurance Regulatory and Development Authority-respondent

no.2 is directed to re-examine each and every policy, even if it has

29

been approved by it, and to bring all such policies offered by SBI

Life in terms with its guidelines. It will examine the policies with an

object as to whether terms have any hidden agenda or terms and

conditions and charges which are detrimental to the policyholders. If

it finds that any of the policies are not in terms with its guidelines, or

have hidden term and charges have any object to deceive the

policyholder, it will direct the SBI Life to discontinue such policies

and to return the entire amount invested to the investors. In such case

it will be open to the Central Government to initiate prosecution

against the management of SBI Life in accordance with the law. The

SBI Life is directed to pay Rs.10,000/- as cost of pursuing the writ

petition to the petitioner

50. The writ petition is disposed of.

Dt.29.5.2014

RKP/