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Judgment reserved on 02.5.2014 Judgment 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 Indiarespondent 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

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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

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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

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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

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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

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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

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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,

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(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

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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

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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

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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

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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

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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

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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

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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

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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

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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 'UtmostGood 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

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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/