Are LIC Policy Holders Entitled To Dividend From Surplus Fund? Bombay High Court To Examine; Refuses To Stall LIC IPO

Three LIC policy holders from Maharashtra's Nashik district have filed a writ petition seeking to quash the amendments made to The Life Insurance Corporation Act, 1956 by way of the Finance Act, 2021. The ad-interim relief sought in the petition was to stay the Draft Red Herring Prospectus (DRHP) filed by the LIC for the issuance of shares in a public issue to investors.

The main arguments by Senior Advocate Pradeep Sancheti, appearing for the petitioners, were that the Finance Bill that was a precursor to the Finance Act 2021 could never have been passed as a Money Bill under Article 110 of the Constitution of India; and that the Finance Act, and specifically the amendments introduced by it to the LIC Act are ultra vires Article 300-A of the Constitution of India.

Sancheti submitted before the court that the amendment to the LIC Act deprived not only the three petitioners but also all those in the same class – LIC policyholders – of their property, and this deprivation was without the authority of law.

According to Sancheti, every policyholder of LIC held 'property' in the surplus from the life insurance business. He submitted that this is provided under section 28(1)(a) of the Act which says that 90 per cent or more of such surplus (from life insurance business) as approved by the Central Government would be "allocated to or reserved for life insurance policyholders".

According to Sancheti, this cake of "surplus", which was entirely available for the policyholders prior to the amendment, was to be distributed among the policyholders as well as the shareholders post the amendment. This, he argued, amounted to deprivation of property as per Article 300-A of the Constitution.

He also cited certain paragraphs of the DRHP which speak of the segregation of the single consolidated life fund of the corporation into two separate funds of a participating policyholders fund and a non-participating policyholders fund.

Additional Solicitor General N Venkataraman, appearing for the Union of India and LIC, submitted that the amendment to the LIC Act was not really a corporate restructuring but must necessarily be a Money Bill because it affects inflows and potential outflows from the Consolidated Fund of India, will have to be considered. He added that this will be a mixed question addressing both the public purpose and the question of whether this is properly so called a Money Bill because of the entanglement of the Consolidated Fund of India.

On the question of 'property' for the Article 300-A challenge, he submitted that there was no binding contract that the petitioners (or that the class that they may be said to represent) had with any assurance to property rights. He argued that the sum assured does not become part of the surplus though it is the part of the LIC fund and if there was no contractual right and every contract of insurance was a contract of utmost good faith, then it must be clearly stated as a matter of contractual right that a policyholder has a divisible, enforceable and realizable right in the property of the surplus fund.

It was further argued that the distinction between participating and non-participating policyholders was that participating holders were those who will pay a higher premium and, in consideration, will be entitled to certain monetary benefits drawn to a defined percentage from the surplus. However, the amended sections 24 and 28 did not give policyholders any statutory right in the surplus.

He also cited the Madras High Court division bench's orderrejecting a similar challenge. The petitioners' counsel, however, argued that their petition raised certain issues which were not even canvassed before that bench.

The Bombay High Court division bench of Justices Gautam Patel and Madhav Jamdar, observed that the Madras HC order may not be binding on their bench, but it would certainly be persuasive and they would give it "very high regard on the principle of comity of the courts and judgments." The court said it would not want to "sit in appeal over those findings."

The bench also observed that prima facie there was not enough material to grant ad-interim relief and the matter be heard finally after the summer vacation.

The bench observed that it was not entirely satisfied that the petitioners and other persons similarly situated, would have an enforceable estate in the surplus of the LIC fund. "…..we do not see how this class of persons can say that the surplus or any part of the LIC fund is their "property" within the meaning of Article 300-A of the Constitution of India. It may be one thing to say that a person has an entitlement to receive a dividend or a bonus or some form of payment. That might conceptually be very different from saying that the person has an in-specie interest in the fund itself", the court observed.

It also added, "It is possible perhaps to draw an analogy that when a person is given a cheque or a negotiable instrument, he, as the holder, has the right to receive the funds but he cannot be said to have property in the bank account on which the cheque is drawn."

The bench said that important aspects that will have to be considered and would require a closer scrutiny later would be – would, by process of exclusion, none other than the policyholders be entitled to a distribution of bonus or dividend or some form of payment out of the surplus fund, and whether this would translate to ownership of any part of the fund is a subtle but very real distinction that the court may have to yet make.

The court directed the respondents to file an affidavit in reply, if they wanted to, by June 9, 2022 followed by a rejoinder from the petitioners, if any, by June 16, 2022. The case has been directed to be listed 'for hearing and final disposal at the stage of admission' on June 21, 2022.

Case Title: Charudatt Changdeo Pawar and Ors. versus Union of India