Performance Clauses In Entertainment Contracts
Producing and editing a masterwork of recorded music is obviously a specialized art form. But so is the entertainment lawyer’s act of drafting clauses, contracts, and contractual language generally. How might the art of the entertainment attorney’s legal drafting a clause or contract affect the musician, composer, songwriter, producer or other artist as a practical matter? Many artists think they will be “home free”, just as soon as they are furnished a draft proposed record contract to sign from the label’s entertainment attorney, and then toss the proposed contract over to their own entertainment lawyer for what they hope will be a rubber-stamp review on all clauses. They are wrong. And those of you who have ever received a label’s “first form” proposed contract are chuckling, right about now.Just because a U.S. record label forwards an artist its “standard form” proposed contract, does not mean that one should sign the draft contract blindly, or ask one’s entertainment lawyer to rubber-stamp the proposed agreement before signing it blindly. A number of label forms still used today are quite hackneyed, and have been adopted as full text or individual clauses in whole or in part from contract form-books or the contract “boilerplate” of other or prior labels. From the entertainment attorney’s perspective, a number of label recording clauses and contracts actually read as if they were written in haste – just like Nigel Tufnel scrawled an 18-inch Stonehenge monument on a napkin in Rob Reiner’s “This Is Spinal Tap”. And if you are a musician, motion picture fan, or other entertainment lawyer, I bet you know what happened to Tap as a result of that scrawl.It stands to reason that an artist and his or her entertainment lawyer should carefully review all draft clauses, contracts, and other forms forwarded to the artist for signature, prior to ever signing on to them. Through negotiation, through the entertainment attorney, the artist may be able to interpose more precise and even-handed language in the contract ultimately signed, where appropriate. Inequities and unfair clauses aren’t the only things that need to be removed by one’s entertainment lawyer from a first draft proposed contract. Ambiguities must also be removed, before the contract can be signed as one.For the artist or the artist’s entertainment attorney to leave an ambiguity or inequitable clause in a signed contract, would be merely to leave a potential bad problem for a later day – particularly in the context of a signed recording contract which could tie up an artist’s exclusive services for many years. And remember, as an entertainment lawyer with any longitudinal data on this item will tell you, the artistic “life-span” of most artists is quite short – meaning that an artist could tie up his or her whole career with one bad contract, one bad signing, or even just one bad clause. Usually these bad contract signings occur before the artist seeks the advice and counsel of an entertainment attorney.One seemingly-inexhaustible type of ambiguity that arises in clauses in entertainment contracts, is in the specific context of what I and other entertainment lawyers refer to as a contract “performance clause”. A non-specific commitment in a contract to perform, usually turns out to be unenforceable. Consider the following:Contract Clause #1: “Label shall use best efforts to market and publicize the Album in the Territory”.Contract Clause #2: “The Album, asdelivered to Label by Artist, shall be produced and edited using only first-class facilities and equipment for sound recording and all other activities relating to the Album”.One shouldn’t use either clause in a contract. One shouldn’t agree to either clause as written. One should negotiate contractual edits to these clauses through one’s entertainment lawyer, prior to signature. Both clauses set forth proposed contractual performance obligations which are, at best, ambiguous. Why? Well, with regard to Contract Clause #1, reasonable minds, including those of the entertainment attorneys on each side of the transaction, can differ as to what “best efforts” really means, what the clause really means if different, or what the two parties to the contract intended “best efforts” to mean at the time (if anything). Reasonable minds, including those of the entertainment lawyers on each side of the negotiation, can also differ as to what constitutes a “first-class” facility as it is “described” in Contract Clause #2. If these contractual clauses were ever scrutinized by judge or jury under the hot lights of a U.S. litigation, the clauses might well be stricken as void for vagueness and unenforceable, and judicially read right out of the corresponding contract itself. In the view of this particular New York entertainment attorney, yes, the clauses really are that bad.Consider Contract Clause #1, the “best efforts” clause, from the entertainment lawyer’s perspective. How would the artist really go about enforcing that contractual clause as against a U.S. label, as a practical matter? The answer is, the artist probably wouldn’t, at end of day. If there ever were a contract dispute between the artist and label over money or the marketing expenditure, for example, this “best efforts” clause would turn into the artist’s veritable Achilles Heel in the contract, and the artist’s entertainment attorney might not be able to help the artist out of it as a practical matter:Artist: “You breached the ‘best efforts’ clause in the contract!”Label: “No! I tried! I tried! I really did!”You get the idea.Why should an artist leave a label with that kind of contractual “escape-hatch” in a clause? The entertainment lawyer’s answer is, “no reason at all”. There is absolutely no reason for the artist to put his or her career at risk by agreeing to a vague or lukewarm contractual marketing commitment clause, if the marketing of the Album is
perceived to be an essential part of the deal by and for the artist. It often is. It would be the artist’s career at stake. If the marketing spend throughout the contract’s Term diminishes over time, so too could the artist’s public recognition and career as a result. And the equities should be on the artist’s side, in a contractual negotiation conducted between entertainment attorneys over this item.Assuming that the label is willing to commit to a contractual marketing spend clause at all, then, the artist-side entertainment lawyer argues, the artist should be entitled to know in advance how his or her career would be protected by the label’s expenditure of marketing dollars. Indeed, asks the entertainment attorney, “Why else is the artist signing this deal other than an advance, marketing spend, and tour support?”. The questions may be phrased a bit differently nowadays, in the current age of the contract now known as the “360 deal”. The clauses may evolve, or devolve, but the equitable arguments remain principally the same.The point is, it is not just performers that should be held to performance clauses in contracts. Companies can be asked by entertainment lawyers to subscribe to performance clauses in contracts, too. In the context of a performance clause – such as a record label’s contractual obligation to market and publicize an album – it is incumbent upon the artist, and the artist’s entertainment attorney if any, to be very specific in the clause itself about what is contractually required of the record company. It should never be left to a subsequent verbal side conversation. In other words, working with his or her entertainment lawyer, the artist should write out a “laundry-list” clause setting forth each of the discrete things that the artist wants the label to do. As but a partial example:Contract Clause #3: “To market and publicize the Album in the Territory, you, Label, will spend no less than ‘x’ U.S. dollars on advertising for the Album during the following time period: ____________”; or even,Contract Clause #4: “To market and publicize the Album in the Territory, you, Label, will hire the ___________ P.R. firm in New York, New York, and you will cause no less than ‘y’ U.S. dollars to be expended for publicity for and directly relating to the Album (and no other property or material) during the following time period: _____________”.Compare Clauses #3 and #4, to Contract Clause #1 earlier above, and then ask yourself or your own entertainment attorney: Which are more hortatory? Which are more precise?As for Contract Clause #2 and its vague unexplained definition of “first-class facilities and equipment” – why not have one’s entertainment lawyer instead just include in the contract a laundry-list clause of the names of five professional recording studios in the relevant city, that both parties, label and artist, prospectively agree constitute “first-class” for definitional purposes? This is supposed to be a contract, after all, the entertainment attorney opines. “Don’t leave your definitions, and therefore definitional problems, for a later document or a later day, unless you truly want to make a personal financial commitment to keeping more litigators awash in business debating bad clauses and bad contracts before the courts”.If you don’t ask, you don’t get. Through the entertainment lawyer, the artist should make the label expressly sign on to a very specific contractual list of tasks in an appropriate clause, monitor the label’s progress thereafter, and hold the label to the specific contractual standard that the artist was smart enough to “carve in” in the clause through the entertainment attorney in the first instance.Again, consider Contract Clause #2, the “first class facilities and equipment” clause, from the entertainment lawyer’s perspective. Note that, unlike Contract Clause #1, this is a promise made by the artist to the label – and not a promise made by the label to the artist.So, an artist might now ask his or her entertainment attorney:”The shoe’s on the other foot, isn’t it?”"‘First class’ in that clause is as vague and undefined a contractual standard as ‘best efforts’, isn’t it, entertainment lawyer?”Entertainment attorney answer: “Right”.”So, entertainment lawyer, there won’t be any harm in me, the artist, signing onto that contractual clause, will there, because I will be able to wiggle out of it if I ever had to, right?”Entertainment attorney answer: “Wrong”.The fact is, a contractual ambiguity in a performance clause is a bad thing – in either case – whether in the context of a label obligation to artist; or even in the context of an artist obligation to a label. The entertainment lawyer should advise that any contractual ambiguity in any clause could hurt the artist, even in the context of one of the artist’s own obligations to the other contracting party. Don’t rest on the linchpin of ambiguities in clauses when conducting business and relying on contracts – even if, in your musical art form itself, as Cameron Crowe once suggested of my first guitar hero Peter Frampton, you may happen to write “obscurantist” song lyrics while taking your own artistic license. Contracts need to be handled differently.Here’s how ambiguity in your own contractual commitment to a label hurts you, from the entertainment lawyer’s perspective. The old-saw contractual principle of music “delivery” often finds the artist required to hand over documents to the label, as well as physical materials such as the album itself in the form of masters, digital masters, or “glass masters”, in order to get paid. By virtue of a contractually-delineated procedure vetted by and between entertainment attorneys, the label may be entitled to hold some (or even all) monies back, and not pay those monies to the artist until “delivery is complete” under the delivery clauses and delivery schedule in a contract. As one might therefore guess, “delivery” is a definite event whose occurrence or non-occurrence under the contract is oft-contested and sometimes even arbitrated or otherwise litigated by and between artists, labels, and the entertainment lawyers and litigators that represent them.It is incumbent upon the artist and the artist’s entertainment attorney to prevent the label from drumming-up a pretextual “failed delivery” under any clause in the contract as an excuse for non-payment. In the context of Contract Clause #2 above, “first-class facilities and equipment” could easily become that pretext – the artist’s Achilles Heel in the litigation-tested contract contested between entertainment lawyer litigators. The label could simply take the position through counsel or otherwise that the delivered materials were not created at a “first-class” facility as contractually required in the relevant clause, no matter what facility was used. Why? Because “first-class” was never defined in any clause in the contractual document by either entertainment attorney on either side, as any particular facility.And if no clause in the contract explicitly defined “first class” as an entertainment lawyer would have advised that it should do, then the artist could well be out the money, at least for the entire duration of an eminently avoidable multi-year litigation over what 2 dumb words mean. Worse yet, meanwhile, the label might be holding the money and laughing at the artist behind the artist’s back for his or her lack of contractual prescience. From the artist-side entertainment lawyer’s perspective, both of those horror-show possible eventualities and scenarios, are intolerable. They could have been avoided by a single, better clause – often the narrow reed upon which an artist’s success ultimately rests. (Ask Billy Joel. Ask Neil Young. Ask Bruce Springsteen. Ask George Michael. Ask John Fogerty).What about prescience? How can this foreseeable contractual delivery dispute in the context of Contract Clause #2, be avoided by the entertainment lawyer? The simple solution in this case, again, is for the artist’s entertainment attorney to take a few extra minutes during the negotiations, and textually list-out, in a reply draft counter-proposed contract sent to the label, even if a single succinct clause, the actual facilities intended to be used. The artist-side entertainment lawyer can seek to make the label explicitly contractually pre-agree to the list of facilities, by name and address, in the body of the contract’s text. That is what a contract is for, anyway, as an entertainment attorney will tell you. When used correctly, a contract and its clauses really just comprise a dispute-avoidance tool. An entertainment contract should be a dispute-avoidance tool exchanged between entertainment lawyers. Also note that a contractual ambiguity in a clause could hurt an artist, regardless of whether it is embedded in one of the artist’s performance obligations, or even in one of the label’s performance obligations! The moral?: List all performance obligations. Break them down into discrete and understandable tasks, clause by clause. Approach it the same way an entertainment attorney would. Better yet – enlist the assistance of one before forming an opinion about the clauses or signing the contract.Click the “Articles” button at: https://www.tormey.org/art.htm to return to the main Articles page.
How Can I Start a Gold Business in Dubai?
When Dubai is mentioned, their gold and diamond collection is one of the first things to come to mind because it is a trend in the emirate. Referred to as the “City of Gold”, the place offers a cheaper cost of gold than most tourists’ home countries. Since Dubai is a popular international vacation destination, the influx of the wealthiest customers can be significantly considered if you want to start a gold business.Indeed, gold is an investment in Dubai as it drives foreign capital in the country. Unknown to many, it is the most profitable business since the precious metals keep their value, and the demand has been continually working every year. While Dubai has historically been a hub for gold traders, they also continuously contribute a significant share in the gold trading business in the UAE. If you are an investor, you should definitely consider setting up a gold trade business in Dubai. If you are not sure how, this article will help you delve deep before the onset of your gold business. With more knowledge and understanding, you can start making a profit out of gold, even in different departments.Where exactly in Dubai?There are different authorities and jurisdictions that highly support gold trading licenses in Dubai. Most of them can be found in Mainland and Freezone. Although there are many, there are three jurisdictions that stand out in Dubai where the highest concentration of gold traders can be found.First on the list would be the Gold Trading License in Dubai’s Department of Economic Development (DED), wherein the heart of the UAE’s gold market is established. This authority is how you incorporate a business in the most famous gold markets in the world, the Gold Souk in Deira. The mainland jurisdiction offers a local license via the DED if an investor opts to form a retail outlet in this area. They can have an opportunity for investors to open up a stall or even a kiosk in Dubai’s most popular tourist areas. Investors must keep in mind that before applying for another commercial license for gold business via the DED, they have to find a local partner who will hold 51 per cent of the shares in the company.The second choice for setting up a gold trade business in Dubai would be in the Gold and Diamond Park located along Sheikh Zayed Road. If you are an expat wanting to own 100 per cent of the business, this place is perfect for you as it is a free zone company setup. You can own 100% of your company with no taxes and have total resettlement of profit. The Gold and Diamond Park is one of the most famous retailers of gold and jewellery with over 90 stores, 118 purpose-built manufacturing blocks, and 350 offices. It is a convenient spot in Dubai City Center, with convenient access to all areas. You can incorporate a gold business company in this area by getting a license from Jebel Ali Freezone Authority (JAFZA).The third choice for your gold business in Dubai is through Dubai Multi Commodities Centre (DMCC), another Free Zone Authority. DMCC is famous for its Dubai Gold and Commodities Exchange (DGCX), DMCC Trade flow, and overall gold value chain.What are the steps?The next thing you need to know is how you will make your gold business in Dubai happen. Different authorities and jurisdictions require other processes and requirements, so it is not easy to have one. Although the gold and jewellery business is popular in Dubai, the government has created specific regulations. It imposes rigorous checkups on those who bring gold or other precious metals in the emirate to have a safe business environment. To guide you, we have listed some of the essential steps you should do to form a gold business company in Dubai..Come up with a Trade NameBefore you can obtain a license, part of its statutory requirement is to have a trading name. Having a trading name is a way for the government to know the business activity you will be carrying.Obtain a Business LicenseThere is no way to start a business in Dubai without having a business license. As mentioned above, you can choose to start your gold business in Dubai with the three different authorities like DED, JAFZA, and DMCC. They all require investors to have their business registered before carrying out their business activity. Unlike JAFZA and DMCC, which is in the Free zone, DED requires a particular requirement of having a local sponsor who will own 51 percent of the shares before he/she can obtain a business license. Usually, getting a license requires some of the primary documents:
Completed Application form
Passport copy of the proposed owner(s)
Two copies of coloured passport photosChoose your Business PremisesThere are various premises to choose from, especially if you opt to set up in the free zone area. They can offer you different offices or facilities that will best suit your business requirements. This process can be done right after you have secured your business license.Obtain your VisaObtaining a visa can be achieved with the help of your service provider. Visas are required, especially if you have to hire an employee. As the holder of a UAE business license, you also have the power to sponsor others for their visa too. The number of visas you can apply for will depend on the size of your company or business, the type of company you choose, and your earnings.Since Dubai has proven itself as a healthy and sustainable environment for jewellery and gold business both local and international investors, it is safe to say that starting a gold company in Dubai is highly profitable and can provide growth for the business.Given all the information above, you may think that starting a gold business in Dubai is not overly complex. Doing it alone may still lead you to troublesome situations and unexpected expenses; that is why it is essential to seek professional help. In IBG Consulting, we guide you based on knowing the legal proceedings and business structuring in Dubai. We have a pool of talented consultants that will help you start your gold business in Dubai or anywhere in the UAE. If you want to know more about how you can create a gold business in Dubai, contact us or visit our website for a consultation.
Insurance Law – An Indian Perspective
INTRODUCTION”Insurance should be bought to protect you against a calamity that would otherwise be financially devastating.”In simple terms, insurance allows someone who suffers a loss or accident to be compensated for the effects of their misfortune. It lets you protect yourself against everyday risks to your health, home and financial situation.Insurance in India started without any regulation in the Nineteenth Century. It was a typical story of a colonial epoch: few British insurance companies dominating the market serving mostly large urban centers. After the independence, it took a theatrical turn. Insurance was nationalized. First, the life insurance companies were nationalized in 1956, and then the general insurance business was nationalized in 1972. It was only in 1999 that the private insurance companies have been allowed back into the business of insurance with a maximum of 26% of foreign holding.”The insurance industry is enormous and can be quite intimidating. Insurance is being sold for almost anything and everything you can imagine. Determining what’s right for you can be a very daunting task.”Concepts of insurance have been extended beyond the coverage of tangible asset. Now the risk of losses due to sudden changes in currency exchange rates, political disturbance, negligence and liability for the damages can also be covered.But if a person thoughtfully invests in insurance for his property prior to any unexpected contingency then he will be suitably compensated for his loss as soon as the extent of damage is ascertained.The entry of the State Bank of India with its proposal of bank assurance brings a new dynamics in the game. The collective experience of the other countries in Asia has already deregulated their markets and has allowed foreign companies to participate. If the experience of the other countries is any guide, the dominance of the Life Insurance Corporation and the General Insurance Corporation is not going to disappear any time soon.
The aim of all insurance is to compensate the owner against loss arising from a variety of risks, which he anticipates, to his life, property and business. Insurance is mainly of two types: life insurance and general insurance. General insurance means Fire, Marine and Miscellaneous insurance which includes insurance against burglary or theft, fidelity guarantee, insurance for employer’s liability, and insurance of motor vehicles, livestock and crops.LIFE INSURANCE IN INDIA”Life insurance is the heartfelt love letter ever written.It calms down the crying of a hungry baby at night. It relieves the heart of a bereaved widow.It is the comforting whisper in the dark silent hours of the night.”Life insurance made its debut in India well over 100 years ago. Its salient features are not as widely understood in our country as they ought to be. There is no statutory definition of life insurance, but it has been defined as a contract of insurance whereby the insured agrees to pay certain sums called premiums, at specified time, and in consideration thereof the insurer agreed to pay certain sums of money on certain condition sand in specified way upon happening of a particular event contingent upon the duration of human life.Life insurance is superior to other forms of savings!”There is no death. Life Insurance exalts life and defeats death.It is the premium we pay for the freedom of living after death.”Savings through life insurance guarantee full protection against risk of death of the saver. In life insurance, on death, the full sum assured is payable (with bonuses wherever applicable) whereas in other savings schemes, only the amount saved (with interest) is payable.The essential features of life insurance are a) it is a contract relating to human life, which b) provides for payment of lump-sum amount, and c) the amount is paid after the expiry of certain period or on the death of the assured. The very purpose and object of the assured in taking policies from life insurance companies is to safeguard the interest of his dependents viz., wife and children as the case may be, in the even of premature death of the assured as a result of the happening in any contingency. A life insurance policy is also generally accepted as security for even a commercial loan.NON-LIFE INSURANCE”Every asset has a value and the business of general insurance is related to the protection of economic value of assets.”Non-life insurance means insurance other than life insurance such as fire, marine, accident, medical, motor vehicle and household insurance. Assets would have been created through the efforts of owner, which can be in the form of building, vehicles, machinery and other tangible properties. Since tangible property has a physical shape and consistency, it is subject to many risks ranging from fire, allied perils to theft and robbery.
Few of the General Insurance policies are:Property Insurance: The home is most valued possession. The policy is designed to cover the various risks under a single policy. It provides protection for property and interest of the insured and family.Health Insurance: It provides cover, which takes care of medical expenses following hospitalization from sudden illness or accident.
Personal Accident Insurance: This insurance policy provides compensation for loss of life or injury (partial or permanent) caused by an accident. This includes reimbursement of cost of treatment and the use of hospital facilities for the treatment.Travel Insurance: The policy covers the insured against various eventualities while traveling abroad. It covers the insured against personal accident, medical expenses and repatriation, loss of checked baggage, passport etc.Liability Insurance: This policy indemnifies the Directors or Officers or other professionals against loss arising from claims made against them by reason of any wrongful Act in their Official capacity.Motor Insurance: Motor Vehicles Act states that every motor vehicle plying on the road has to be insured, with at least Liability only policy. There are two types of policy one covering the act of liability, while other covers insurers all liability and damage caused to one’s vehicles.JOURNEY FROM AN INFANT TO ADOLESCENCE!Historical PerspectiveThe history of life insurance in India dates back to 1818 when it was conceived as a means to provide for English Widows. Interestingly in those days a higher premium was charged for Indian lives than the non-Indian lives as Indian lives were considered more risky for coverage.The Bombay Mutual Life Insurance Society started its business in 1870. It was the first company to charge same premium for both Indian and non-Indian lives. The Oriental Assurance Company was established in 1880. The General insurance business in India, on the other hand, can trace its roots to the Triton (Tital) Insurance Company Limited, the first general insurance company established in the year 1850 in Calcutta by the British. Till the end of nineteenth century insurance business was almost entirely in the hands of overseas companies.Insurance regulation formally began in India with the passing of the Life Insurance Companies Act of 1912 and the Provident Fund Act of 1912. Several frauds during 20′s and 30′s desecrated insurance business in India. By 1938 there were 176 insurance companies. The first comprehensive legislation was introduced with the Insurance Act of 1938 that provided strict State Control over insurance business. The insurance business grew at a faster pace after independence. Indian companies strengthened their hold on this business but despite the growth that was witnessed, insurance remained an urban phenomenon.The Government of India in 1956, brought together over 240 private life insurers and provident societies under one nationalized monopoly corporation and Life Insurance Corporation (LIC) was born. Nationalization was justified on the grounds that it would create much needed funds for rapid industrialization. This was in conformity with the Government’s chosen path of State lead planning and development.The (non-life) insurance business continued to prosper with the private sector till 1972. Their operations were restricted to organized trade and industry in large cities. The general insurance industry was nationalized in 1972. With this, nearly 107 insurers were amalgamated and grouped into four companies – National Insurance Company, New India Assurance Company, Oriental Insurance Company and United India Insurance Company. These were subsidiaries of the General Insurance Company (GIC).The life insurance industry was nationalized under the Life Insurance Corporation (LIC) Act of India. In some ways, the LIC has become very flourishing. Regardless of being a monopoly, it has some 60-70 million policyholders. Given that the Indian middle-class is around 250-300 million, the LIC has managed to capture some 30 odd percent of it. Around 48% of the customers of the LIC are from rural and semi-urban areas. This probably would not have happened had the charter of the LIC not specifically set out the goal of serving the rural areas. A high saving rate in India is one of the exogenous factors that have helped the LIC to grow rapidly in recent years. Despite the saving rate being high in India (compared with other countries with a similar level of development), Indians display high degree of risk aversion. Thus, nearly half of the investments are in physical assets (like property and gold). Around twenty three percent are in (low yielding but safe) bank deposits. In addition, some 1.3 percent of the GDP are in life insurance related savings vehicles. This figure has doubled between 1985 and 1995.A World viewpoint – Life Insurance in IndiaIn many countries, insurance has been a form of savings. In many developed countries, a significant fraction of domestic saving is in the form of donation insurance plans. This is not surprising. The prominence of some developing countries is more surprising. For example, South Africa features at the number two spot. India is nestled between Chile and Italy. This is even more surprising given the levels of economic development in Chile and Italy. Thus, we can conclude that there is an insurance culture in India despite a low per capita income. This promises well for future growth. Specifically, when the income level improves, insurance (especially life) is likely to grow rapidly.INSURANCE SECTOR REFORM:Committee Reports: One Known, One Anonymous!Although Indian markets were privatized and opened up to foreign companies in a number of sectors in 1991, insurance remained out of bounds on both counts. The government wanted to proceed with caution. With pressure from the opposition, the government (at the time, dominated by the Congress Party) decided to set up a committee headed by Mr. R. N. Malhotra (the then Governor of the Reserve Bank of India).Malhotra CommitteeLiberalization of the Indian insurance market was suggested in a report released in 1994 by the Malhotra Committee, indicating that the market should be opened to private-sector competition, and eventually, foreign private-sector competition. It also investigated the level of satisfaction of the customers of the LIC. Inquisitively, the level of customer satisfaction seemed to be high.In 1993, Malhotra Committee – headed by former Finance Secretary and RBI Governor Mr. R. N. Malhotra – was formed to evaluate the Indian insurance industry and recommend its future course. The Malhotra committee was set up with the aim of complementing the reforms initiated in the financial sector. The reforms were aimed at creating a more efficient and competitive financial system suitable for the needs of the economy keeping in mind the structural changes presently happening and recognizing that insurance is an important part of the overall financial system where it was necessary to address the need for similar reforms. In 1994, the committee submitted the report and some of the key recommendations included:o StructureGovernment bet in the insurance Companies to be brought down to 50%. Government should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as independent corporations. All the insurance companies should be given greater freedom to operate.
CompetitionPrivate Companies with a minimum paid up capital of Rs.1 billion should be allowed to enter the sector. No Company should deal in both Life and General Insurance through a single entity. Foreign companies may be allowed to enter the industry in collaboration with the domestic companies. Postal Life Insurance should be allowed to operate in the rural market. Only one State Level Life Insurance Company should be allowed to operate in each state.o Regulatory BodyThe Insurance Act should be changed. An Insurance Regulatory body should be set up. Controller of Insurance – a part of the Finance Ministry- should be made Independent.o InvestmentsCompulsory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%. GIC and its subsidiaries are not to hold more than 5% in any company (there current holdings to be brought down to this level over a period of time).o Customer ServiceLIC should pay interest on delays in payments beyond 30 days. Insurance companies must be encouraged to set up unit linked pension plans. Computerization of operations and updating of technology to be carried out in the insurance industry. The committee accentuated that in order to improve the customer services and increase the coverage of insurance policies, industry should be opened up to competition. But at the same time, the committee felt the need to exercise caution as any failure on the part of new competitors could ruin the public confidence in the industry. Hence, it was decided to allow competition in a limited way by stipulating the minimum capital requirement of Rs.100 crores.The committee felt the need to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives. For this purpose, it had proposed setting up an independent regulatory body – The Insurance Regulatory and Development Authority.Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in Parliament in December 1999. The IRDA since its incorporation as a statutory body in April 2000 has meticulously stuck to its schedule of framing regulations and registering the private sector insurance companies.Since being set up as an independent statutory body the IRDA has put in a framework of globally compatible regulations. The other decision taken at the same time to provide the supporting systems to the insurance sector and in particular the life insurance companies was the launch of the IRDA online service for issue and renewal of licenses to agents. The approval of institutions for imparting training to agents has also ensured that the insurance companies would have a trained workforce of insurance agents in place to sell their products.The Government of India liberalized the insurance sector in March 2000 with the passage of the Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign ownership. Under the current guidelines, there is a 26 percent equity lid for foreign partners in an insurance company. There is a proposal to increase this limit to 49 percent.The opening up of the sector is likely to lead to greater spread and deepening of insurance in India and this may also include restructuring and revitalizing of the public sector companies. In the private sector 12 life insurance and 8 general insurance companies have been registered. A host of private Insurance companies operating in both life and non-life segments have started selling their insurance policies since 2001Mukherjee CommitteeImmediately after the publication of the Malhotra Committee Report, a new committee, Mukherjee Committee was set up to make concrete plans for the requirements of the newly formed insurance companies. Recommendations of the Mukherjee Committee were never disclosed to the public. But, from the information that filtered out it became clear that the committee recommended the inclusion of certain ratios in insurance company balance sheets to ensure transparency in accounting. But the Finance Minister objected to it and it was argued by him, probably on the advice of some of the potential competitors, that it could affect the prospects of a developing insurance company.LAW COMMISSION OF INDIA ON REVISION OF THE INSURANCE ACT 1938 – 190th Law Commission ReportThe Law Commission on 16th June 2003 released a Consultation Paper on the Revision of the Insurance Act, 1938. The previous exercise to amend the Insurance Act, 1938 was undertaken in 1999 at the time of enactment of the Insurance Regulatory Development Authority Act, 1999 (IRDA Act).The Commission undertook the present exercise in the context of the changed policy that has permitted private insurance companies both in the life and non-life sectors. A need has been felt to toughen the regulatory mechanism even while streamlining the existing legislation with a view to removing portions that have become superfluous as a consequence of the recent changes.Among the major areas of changes, the Consultation paper suggested the following:a. merging of the provisions of the IRDA Act with the Insurance Act to avoid multiplicity of legislations;b. deletion of redundant and transitory provisions in the Insurance Act, 1938;c. Amendments reflect the changed policy of permitting private insurance companies and strengthening the regulatory mechanism;d. Providing for stringent norms regarding maintenance of ‘solvency margin’ and investments by both public sector and private sector insurance companies;e. Providing for a full-fledged grievance redressal mechanism that includes:o The constitution of Grievance Redressal Authorities (GRAs) comprising one judicial and two technical members to deal with complaints/claims of policyholders against insurers (the GRAs are expected to replace the present system of insurer appointed Ombudsman);o Appointment of adjudicating officers by the IRDA to determine and levy penalties on defaulting insurers, insurance intermediaries and insurance agents;o Providing for an appeal against the decisions of the IRDA, GRAs and adjudicating officers to an Insurance Appellate Tribunal (IAT) comprising a judge (sitting or retired) of the Supreme Court/Chief Justice of a High Court as presiding officer and two other members having sufficient experience in insurance matters;o Providing for a statutory appeal to the Supreme Court against the decisions of the IAT.LIFE & NON-LIFE INSURANCE – Development and Growth!The year 2006 turned out to be a momentous year for the insurance sector as regulator the Insurance Regulatory Development Authority Act, laid the foundation for free pricing general insurance from 2007, while many companies announced plans to attack into the sector.Both domestic and foreign players robustly pursued their long-pending demand for increasing the FDI limit from 26 per cent to 49 per cent and toward the fag end of the year, the Government sent the Comprehensive Insurance Bill to Group of Ministers for consideration amid strong reservation from Left parties. The Bill is likely to be taken up in the Budget session of Parliament.The infiltration rates of health and other non-life insurances in India are well below the international level. These facts indicate immense growth potential of the insurance sector. The hike in FDI limit to 49 per cent was proposed by the Government last year. This has not been operationalized as legislative changes are required for such hike. Since opening up of the insurance sector in 1999, foreign investments of Rs. 8.7 billion have tipped into the Indian market and 21 private companies have been granted licenses.The involvement of the private insurers in various industry segments has increased on account of both their capturing a part of the business which was earlier underwritten by the public sector insurers and also creating additional business boulevards. To this effect, the public sector insurers have been unable to draw upon their inherent strengths to capture additional premium. Of the growth in premium in 2004-05, 66.27 per cent has been captured by the private insurers despite having 20 per cent market share.The life insurance industry recorded a premium income of Rs.82854.80 crore during the financial year 2004-05 as against Rs.66653.75 crore in the previous financial year, recording a growth of 24.31 per cent. The contribution of first year premium, single premium and renewal premium to the total premium was Rs.15881.33 crore (19.16 per cent); Rs.10336.30 crore (12.47 per cent); and Rs.56637.16 crore (68.36 per cent), respectively. In the year 2000-01, when the industry was opened up to the private players, the life insurance premium was Rs.34,898.48 crore which constituted of Rs. 6996.95 crore of first year premium, Rs. 25191.07 crore of renewal premium and Rs. 2740.45 crore of single premium. Post opening up, single premium had declined from Rs.9, 194.07 crore in the year 2001-02 to Rs.5674.14 crore in 2002-03 with the withdrawal of the guaranteed return policies. Though it went up marginally in 2003-04 to Rs.5936.50 crore (4.62 per cent growth) 2004-05, however, witnessed a significant shift with the single premium income rising to Rs. 10336.30 crore showing 74.11 per cent growth over 2003-04.The size of life insurance market increased on the strength of growth in the economy and concomitant increase in per capita income. This resulted in a favourable growth in total premium both for LIC (18.25 per cent) and to the new insurers (147.65 per cent) in 2004-05. The higher growth for the new insurers is to be viewed in the context of a low base in 2003- 04. However, the new insurers have improved their market share from 4.68 in 2003-04 to 9.33 in 2004-05.The segment wise break up of fire, marine and miscellaneous segments in case of the public sector insurers was Rs.2411.38 crore, Rs.982.99 crore and Rs.10578.59 crore, i.e., a growth of (-)1.43 per cent, 1.81 per cent and 6.58 per cent. The public sector insurers reported growth in Motor and Health segments (9 and 24 per cent). These segments accounted for 45 and 10 per cent of the business underwritten by the public sector insurers. Fire and “Others” accounted for 17.26 and 11 per cent of the premium underwritten. Aviation, Liability, “Others” and Fire recorded negative growth of 29, 21, 3.58 and 1.43 per cent. In no other country that opened at the same time as India have foreign companies been able to grab a 22 per cent market share in the life segment and about 20 per cent in the general insurance segment. The share of foreign insurers in other competing Asian markets is not more than 5 to 10 per cent.The life insurance sector grew new premium at a rate not seen before while the general insurance sector grew at a faster rate. Two new players entered into life insurance – Shriram Life and Bharti Axa Life – taking the total number of life players to 16. There was one new entrant to the non-life sector in the form of a standalone health insurance company – Star Health and Allied Insurance, taking the non-life players to 14.A large number of companies, mostly nationalized banks (about 14) such as Bank of India and Punjab National Bank, have announced plans to enter the insurance sector and some of them have also formed joint ventures.The proposed change in FDI cap is part of the comprehensive amendments to insurance laws – The Insurance Act of 1999, LIC Act, 1956 and IRDA Act, 1999. After the proposed amendments in the insurance laws LIC would be able to maintain reserves while insurance companies would be able to raise resources other than equity.About 14 banks are in queue to enter insurance sector and the year 2006 saw several joint venture announcements while others scout partners. Bank of India has teamed up with Union Bank and Japanese insurance major Dai-ichi Mutual Life while PNB tied up with Vijaya Bank and Principal for foraying into life insurance. Allahabad Bank, Karnataka Bank, Indian Overseas Bank, Dabur Investment Corporation and Sompo Japan Insurance Inc have tied up for forming a non-life insurance company while Bank of Maharashtra has tied up with Shriram Group and South Africa’s Sanlam group for non-life insurance venture.CONCLUSIONIt seems cynical that the LIC and the GIC will wither and die within the next decade or two. The IRDA has taken “at a snail’s pace” approach. It has been very cautious in granting licenses. It has set up fairly strict standards for all aspects of the insurance business (with the probable exception of the disclosure requirements). The regulators always walk a fine line. Too many regulations kill the motivation of the newcomers; too relaxed regulations may induce failure and fraud that led to nationalization in the first place. India is not unique among the developing countries where the insurance business has been opened up to foreign competitors.The insurance business is at a critical stage in India. Over the next couple of decades we are likely to witness high growth in the insurance sector for two reasons namely; financial deregulation always speeds up the development of the insurance sector and growth in per capita GDP also helps the insurance business to grow.