HDFC's life insurance arm to share profits with independent directors

Mortgage lender HDFC Ltd's 14-year-old life insurance subsidiary has decided to share profits with independent directors.

The additional money, apart from sitting fees to independent directors, will be doled out as a commission on profits for a five-year period commencing April 1, 2013.

This type of additional payment is allowed under Sections 349 and 350 of the Companies Act, 1956, with an upper limit of one per cent of the total profit in a year.

Independent directors are not involved in the day-to-day functioning of the company. They are also not directly connected with promoters or directors and don't have any financial dealing with the company. They normally get sitting fees for attending board meetings. But these directors have often been in the firing line for not raising the red flag.

HDFC Life Insurance reasons that independent directors bring significant experience across a wide spectrum of functional areas. The insurer also felt that it was necessary to compensate them for their time and effort and also to retain and attract a talent pool.

An HDFC Life spokesperson says this is to recognise their contribution and participation in the company's business affairs. "We started paying directors' commission only after the company started posting net profits," says the spokesperson.

While many private-sector insurers are still reeling under losses, HDFC Life is on a strong profitable growth path with Rs 725 crore of net profit recorded in the just concluded fiscal year 2013/14 compared with Rs 450 crore the previous year. Its assets under management stand at Rs 50,300 crore.

Many other companies also follow the practice of giving commission out of profits to independent directors.

Large companies with well-established track records of profitability like Hindustan Unilever and Bajaj Auto are some of the examples that reward independent directors with commissions out of profits.

HDFC Life's independent directors include Ravi Narain, former managing director of the National Stock Exchange; S.A. Dave, former UTI boss; well-known chartered accountant Gautam Divan, infrastructure expert A.K.T. Chari and management consultant Ranjan Pant.

HDFC Life is a joint venture between HDFC Ltd and Standard Life Plc where the mortgage lender owns 72.37 per cent and while the UK company holds 26 per cent. There are a few minority shareholders. The company is among the top three private-sector insurance companies in terms of individual and group business.