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CS Professional · Banking and Insurance - Laws and Practice · Functions in Insurance and Compliance related thereto (Part I)

Himalaya Life Ltd shows a valuation surplus of ₹60 crore. To enlarge the distributable surplus, it transfers ₹10 crore from a reserve fund (built partly from share premium receipts) into the revenue account after the valuation date. Under section 49(1), what is the position?

The transfer cannot validly increase the surplus. Section 49(1) allows reserve-fund contributions to enlarge the surplus only if brought into the revenue account on or before the valuation date, unless the reserve consists solely of transfers from earlier disclosed surpluses. This transfer was made later and the reserve is partly share premium.

  1. AThe transfer increases the surplus validly, because reserve funds are the insurer's own money
  2. BThe contribution cannot increase the surplus unless brought into the revenue account on or before the valuation date, or the reserve is made up solely of transfers from earlier disclosed surplusesCorrect
  3. CThe transfer is valid if the Authority is informed within a year
  4. DThe transfer is valid because the reserve fund exceeds ₹10 crore

Explanation

Section 49(1) prohibits increasing the surplus by contributions out of any reserve fund or otherwise unless they were brought into the revenue account on or before the valuation date. The exception is a reserve fund made up solely of transfers from similar surpluses disclosed in valuations already returned under section 15. This one was made after the date and is partly from share premium, so it fails.

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