18. Provisions, contingent liabilities and contingent assets
Provisions are accounted for in respect of present obligations arising out of past events where it is probable that an outflow of resources will be required to settle the obligation and the amounts of which can be reliably estimated. Provisions are determined on the basis of best estimate of the outflow of economic benefits required to settle the obligation at the Balance Sheet date. Where no reliable estimate can be made, a disclosure is made as contingent liability. Contingent liabilities are disclosed in respect of;
a) possible obligations arising out of past events, but their existence or otherwise would be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Company or
b) Present obligations that arise from past events, where it is probable but not likely that an outflow of resources embodying economic benefits will be required to settle the obligations or a reliable estimate of the amounts of the obligations cannot be made.
Where there is a possible obligation or a present obligation where the likelihood of outflow of resources is remote, neither provision is recognised nor disclosure is made.
Contingent assets are neither accounted for nor disclosed.
19. Leases
A) Finance leases
Leases under which the lessee assumes substantially all the risk and rewards of ownership of the asset are classified as finance leases. Such leased asset acquired are capitalised at fair value of the asset or present value of the minimum lease rental payments at the inception of the lease, whichever is lower.
B) Operating leases
Leases where the lessor effectively retains substantially all the risk and the benefits of ownership over the lease term are classified as operating leases. Leased rental payments under operating leases including committed increase in rentals are accounted for as an expense, on a straight line basis, over the non-cancellable lease period.
20. Taxation:
A) Direct tax
I) Provision for income tax
Provision for income tax is made in accordance with the provisions of Section 44 of the Income Tax Act, 1961 read with Rules contained in the First Schedule and other relevant provisions of the Income Tax Act,
1961 as applicable to a Company carrying on life insurance business.
II) Deferred tax
In accordance with the provisions of the Accounting Standard (AS) 22, "Accounting for Taxes on Income", with respect to the carry forward of losses under the Income Tax regulations, the deferred tax asset is recognised only to the extent that there is a virtual certainty supported by convincing evidence that future taxable income will be available against which the deferred tax asset can be realised.
B) Indirect tax
The Company claims credit of Goods and Services Tax on input services, which is set off against Goods and Services Tax on output services. Unutilised credits, if any, are carried forward under "Advances and other assets "for future set off and are deferred for recognition to the extent there is reasonable certainty that the assets can be realised in future.
21. Earnings per share
In accordance with the requirement of Accounting Standard (AS) 20, "Earnings Per Share", basic earnings per share is calculated by dividing the net profit or loss for the year attributable to equity shareholders by the weighted average number of equity shares outstanding during the year.
For the purpose of calculating diluted earnings per share, the net profit or loss for the year attributable to equity shareholders and the weighted average number of shares outstanding during the period are adjusted for the effects of all dilutive potential equity shares. Potential equity shares are treated as dilutive only if their conversion to equity shares would decrease the net profit per share from continuing ordinary operations.
22. Cash and cash equivalents
Cash and cash equivalents for the purposes of Receipts and Payments Account comprise of cash and cheques in hand, bank balances, fixed deposits with original maturity of three months or less, Reverse Repo, highly liquid mutual funds and highly liquid investments that are readily convertible into measurable amounts of cash and which are subject to insignificant risk of change in value. Receipts and Payments Account is prepared and reported using the Direct Method in accordance with Accounting Standard (AS) 3, "Cash Flow Statements" as per requirements of Para 2.2 of the Master Circular.
''The contingent liability denominated in foreign currency at the balance sheet date is disclosed by using the closing rate. #Statutory demands and liabilities in dispute, not provided for, relate to the show cause cum demand notices/assessment orders received by the Company from the respective tax Authorities. The Company has filed / in the process of filing appeals against the demand notices/assessment orders with the appellate authorities and has been advised by the experts that the grounds of appeal are well supported in law in view of which the Company does not expect any liability to arise in this regard.
During the quarterended June 30,2023, the Company had received a show cause cum demand notice (SCN) of' 9,421,846 thousands from the Directorate General of GST Intelligence ('Authority') pertaining to the period July 2017 to FY 2022 on account of disputed input tax credit (ITC) availed and utilised by the Company in respect of certain services. The Company had also deposited' 2,500,000 thousands under protest with the Authority in this matter. On January 5,2024, the Company has submitted its detailed response to the SCN with the Adjudicating Authority, contesting the issues raised in the SCN. The Company continues to disclose the said amount as contingent liability.
During the quarter ended March 31, 2024, the Company has received an assessment order passed under section 143(3) of the Income-tax Act, 1961, for FY 2019-20. The addition/disallowance pertaining to certain expenses resulting in post rectification aggregate demand of' 887,895 thousands (tax demand of' 612,571 thousands along with interest of' 275,324 thousands) has been disclosed as Contingent Liability. The tax demand as per the assessment order was erroneously computed at the corporate rate of tax instead of the applicable tax rate for life insurance companies under section 115B of the Income tax Act, 1961. While the Company has filed a rectification application, it awaits the Rectification Order.
**The company had received demand notice from Employees Provident Fund Organization (EPFO) claiming damages and interest and subsequently the final orders from EPFO totaling ' 13,840 thousands. The Company has paid damages and interest totaling ' 13,840 thousands during the year.
2. Pending litigations
The Company's pending litigations other than those arising in the ordinary course of insurance business comprise of claims against the Company primarily on account of proceedings pending with Tax authorities and Claims, under policies, not acknowledged as debts (net of reinsurance). The Company has reviewed all its pending litigations and proceedings and has adequately provided for where provisions are required and disclosed the contingent liabilities as applicable, in note 1 of Schedule 16 (B). The Company does not expect the outcome of these proceedings to have a material adverse effect on its financial statements as at March 31, 2024.
3. Actuarial assumptions
The policyholders' actuarial liabilities are determined based on assumptions as to the future experience of the policies. The principal assumptions are related to interest, expenses, mortality, morbidity, persistency and additionally in the case of participating policies, bonuses and tax. The assumptions are based on prudent estimates of the future experience, and hence include margins for adverse deviations over and above the best estimate assumptions. A brief of the assumptions used by the Appointed Actuary in actuarial valuation is as below:
a) Interest rate assumptions:
The valuation rate of interest is determined based on the expected return on existing assets, current asset mix, expected investment return on the future investment taking into consideration the asset classes mix and expected future asset mix. The interest rates used for the valuation vary according to the type and term of the product & status of policy and are presented in the table below.
c) Mortality assumptions:
Mortality assumptions are set in accordance with Clause 5(2) of Schedule II of the IRDAI (Assets, Liabilities and Solvency Margin of Life Insurance Business) Regulations, 2016, in reference to the published Indian Assured Lives Mortality (2012-14) and are based on the latest experience analysis of the business.
In the case of annuity benefits, mortality assumption is based on the Indian Individual Annuitant's Mortality Table (2012-15).
d) Morbidity assumptions:
Morbidity assumptions are set in accordance with Clause 5(3) of Schedule II of the IRDAI (Assets, Liabilities and Solvency Margin of Life Insurance Business) Regulations, 2016, in reference to the published CIBT 93 Table and are based on the latest experience analysis of the business.
e) Persistency assumptions:
The persistency assumptions are also based on the most recent experience of the Company and vary according to the premium frequency and type of the product.
f) Provision for free-look period:
If a policy which is in force as at the valuation date is subsequently cancelled in the free-look period, then there could be a strain in the policyholder fund on account of the amount payable on free-look cancellation, to the extent the amount is higher than reserves held for that policy. In order to avoid the future valuation strain as a result of the free-look cancellations, reserves on account of the above are held. The free-look reserve is calculated as total strain for all policies that are eligible for free-look cancellations at the valuation date, multiplied by a factor, representing the expected assumptions for free-look cancellations.
g) Bonus rates:
The bonus rates for the participating business as required to be declared in the future is based on the interest expected to be earned as per the valuation assumptions.
h) Tax:
The tax rate as applicable to insurance companies carrying on insurance business is 14.56% p.a. (for the year ended March 31, 2023: 14.56% p.a.).
4. Employee benefits A) Defined contribution plans:
During the year, the Company has recognised below amount in the Revenue Account under defined contributions plans.
Defined benefit plans:
I. Gratuity:
a) General description of defined benefit plan
This is a funded defined benefit plan for qualifying employees under which the Company makes a contribution to the HDFC Life Insurance Company Limited Employees Gratuity Trust (Trust). The plan provides for a lump sum payment as determined in the manner specified under The Payment of Gratuity Act, 1972, to the vested employees either at retirement or on death while in employment or on termination of employment. The benefit vests after five years of continuous service. Defined benefit obligations are actuarially determined at each quarterly Balance Sheet date using the projected unit credit method as required under Accounting Standard (AS) 15 (Revised), "Employee benefits". Actuarial gains or losses are recognised in the Revenue Account.
II. Basis used to determine the overall expected return:
Expected rate of return on investments of the Gratuity plan is determined based on the assessment made by the Company (Trust) at the beginning of the year on the return expected on its existing portfolio, along with the return on estimated incremental investments to be made during the year. Yield on the portfolio is calculated based on suitable mark-up over benchmark Government Securities of similar maturities.
5. Employee Stock Option Scheme (ESOS)
(i) The Company has granted options to employees under the ESOS 2005, ESOS 2010, ESOS 2011 and ESOS 2012 and ESOS (Trust) 2017 schemes. These schemes are administered by the HDFC Life Employees Stock Option Trust. The Trust had subscribed to the capital of the Company and also acquired shares of the Company from Housing Development Finance Corporation Limited, the holding Company then. The options are granted to the employees from these tranches of shares. For all the grants, the mode of settlement is through equity shares. All the grants have graded vesting. The exercise price of ESOS 2005 is based on the holding cost of the shares in the books of the Trust and that of ESOS 2010, ESOS 2011 and ESOS 2012 is based on the fair market value as determined by the Category I Merchant Banker registered with SEBI. The exercise price, of the options granted under ESOS (Trust) 2017 is based on the market price of the shares of the Company, as defined in the ESOS (Trust) 2017 scheme. There are no options outstanding or exercisable for ESOS 2005, ESOS 2010 and ESOS 2011 as of March 31, 2024 and as of March 31, 2023.
(ii) The Company has also granted options to its employees under the ESOS 2014 scheme, ESOS 2015 scheme, ESOS 2016 scheme, ESOS 2017, ESOS 2018, ESOS 2019 and ESOS 2022 schemes. The said schemes are directly administered by the Company. For all the grants, the mode of settlement is through equity shares. All the grants have graded vesting. The exercise price of ESOS 2014, ESOS 2015 and of ESOS 2016 schemes is based on the fair market value as determined by the Category I Merchant Banker registered with SEBI. The exercise price, of the options granted under ESOS 2017, ESOS 2018, ESOS 2019 and ESOS 2022 is based on the market price of the shares of the Company, as defined in the respective ESOS scheme.
(iii) The Company follows the intrinsic value method of accounting for stock options granted to employees. The intrinsic value of the options issued under the above referred schemes is 'Nil' as the exercise price of the option is the same as fair value of the underlying share on the grant date and accordingly, no expenses are recognised in the books. Had the Company followed the fair value method for valuing its options, the charge to the Revenue Account/Profit & Loss Account for the year would have been aggregated to ' 816,721 thousands (Previous year ended March 31, 2023'493,610 thousands) and the profit after tax would have been lower by ' 504,245 thousands (Previous year ended March 31, 2023'291,605 thousands). Consequently, Company's basic and diluted earnings per share would have been ' 7.06 and ' 7.06 respectively (Previous year: ' 6.24 and ' 6.24 respectively).
(iv) Exercise Period under the various ESOS:
The Company's shares were listed on National Stock Exchange of India Limited (NSE) and BSE Limited (BSE) on November 17, 2017. Prior to listing, for all grants issued under the ESOS 2010, ESOS 2011, ESOS 2012, ESOS 2014, ESOS 2015 and ESOS 2016 schemes, the vested options were required to be exercised by the employees within five years from the date of vesting or the date of an Initial Public Offering (IPO) whichever is later subject to the norms prescribed by the Nomination & Remuneration Committee. Post listing of the Company's shares, vested options under all ESOS schemes are required to be exercised by the employees within five years from the date of vesting subject to the norms prescribed by the Nomination & Remuneration Committee.
Salient features of all the existing grants under the various schemes are as stated below:
A) ESOS 2014
There were two grants issued on December 1, 2014 and February 1, 2015. The total number of options granted upto March 31, 2024 are 15,034,250 (Previous year ended March 31, 2023: 15,034,250). The weighted average remaining contractual life of the options outstanding as at March 31, 2024 is Nil years (Previous year ended March 31, 2023: Nil years).
A summary of status of ESOS 2014 in terms of options granted, forfeited, exercised, outstanding and exercisable along with the weighted average exercise price is as given below:
B) ESOS 2015
There were two grants issued on October 1, 2015 and November 1, 2015. The total number of options granted till March 31, 2024 are 9,733,300 (Previous year ended March 31, 2023: 9,733,300). The weighted average remaining contractual life of the options outstanding as at March 31, 2024 is Nil years (Previous year ended March 31, 2023: Nil years).
There was one grant issued on September 19, 2019, one grant issued on October 19, 2020, one grant issued on March 17, 2021, one grant issued on October 22, 2021 and one grant issued on March 15, 2022 as of March 31, 2024. The total number of options granted till March 31, 2024 are 8,621,108 (Previous year ended March 31, 2023: 8,621,108 ). The weighted average remaining contractual life of the options outstanding as at March 31, 2024 is 2.58 years (Previous year ended March 31, 2023: 3.51 years).
A summary of status of ESOS 2019 in terms of options granted, forfeited and exercised, outstanding and exercisable along with the weighted average exercise price at the different grant dates is as given below:
There was one grant issued on October 20, 2022 and one grant issued on January 20, 2023 as of March 31, 2023. The total number of options granted till March 31, 2024 are 490,000 (Previous year ended March 31, 2023: 490,000). The weighted average remaining contractual life of the options outstanding as at March 31, 2024 is 7.86 years (Previous year ended March 31, 2023: 8.86 years).
A summary of status of ESOS 2022 in terms of options granted, forfeited and exercised, outstanding and exercisable along with the weighted average exercise price at the different grant dates is as given below:
10. Leases
I n accordance with the Accounting Standard (AS) 19, "Leases", the following disclosures are made in respect of operating leases:
a) The Company has hired motor vehicles on cancellable operating lease for a term of up to five years. In respect of these operating leases, the lease rentals debited to the Revenue Account are ' 2,638 thousands (Previous year ended March 31, 2023: ' 5,320 thousands).
13. Corporate Social Responsibility (CSR)
As per section 135 of the Companies Act, 2013 and amendment rules, the gross amount required to be spent by the Company during the year ended March 31, 2024 is ' 1,53,001 thousands (Previous year ended March 31, 2023 ' 156,374 thousands). The Company has incurred ' 2,32,251 thousands (Previous year ended March 31, 2023: ' 195,340 thousands) on various CSR initiatives.
15. Derivative contracts:
In accordance with the IRDAI circular no. IRDA/F&I/INV/CIR/138/06/2014 dated June 11, 2014 ('the IRDAI circular on Interest Rate Derivatives') and IRDAI Investment Master Circular (as revised in Oct 2022) allowing insurers to deal in rupee interest rate derivatives, the Company has in place a derivative policy approved by Board which covers various aspects that apply to the functioning of the derivative transactions undertaken to substantiate the hedge strategy to mitigate the interest rate risk, thereby managing the volatility of returns from future fixed income investments, due to variations in market interest rates.
a) The Company has during the year, as part of its Hedging strategy, entered into Forward Rate Agreements (FRA) and Interest Rate Futures (IRF) transactions to hedge the interest rate sensitivity for highly probable forecasted transactions as permitted by the IRDAI circular on Interest Rate Derivatives.
FRA derivative contracts are over-the-counter (OTC) transactions and IRF are exchange trade standard contracts, agreeing to buy notional value of a debt security or Government Bond (GOI) at a specified future date, at a price determined at the time of the contract with an objective to lock in the price of an interest bearing security at a future date.
The Forward Rate Agreement (FRA) contract is valued at the difference between the market value of underlying bond at the spot reference yield taken from the SEBI approved rating agency and present value of contracted forward price of underlying bond including present value of intermediate coupon inflows from valuation date till FRA contract settlement date, at applicable INR-OIS rate curve.
The Interest Rate Futures (IRF) are exchanged traded derivative instrument and valued at closing settlement prices published by primary stock exchange.
Qualitative Disclosures on risk exposure in Fixed Income Derivatives:
Overview of business and processes:
a) Fixed Income Derivative Hedging instruments:
Derivatives are financial instruments whose characteristics are derived from the underlying assets, or from interest and exchange rates or indices. These include forward rate agreements, interest rate swaps and interest rate futures.
The Company during the financial year has entered into FRA and IRF derivative instrument to minimise exposure to fluctuations in interest rates on plan assets and liabilities. This hedge is carried in accordance with its established policies, goals and applicable regulations. The Company does not engage in derivative transactions for speculative purposes.
b) Derivative policy/process and Hedge effectiveness assessment:
The Company has well defined Board approved Derivative Policy and Process document setting out the strategic objectives, regulatory and operational framework and risks associated with interest rate derivatives along with having measurement, monitoring processes and controls thereof. The accounting policy has been clearly laid out for ensuring a process of periodic effectiveness assessment and accounting.
The Company has clearly identified roles and responsibilities to ensure independence and accountability through the investment decision, trade execution, to settlement, accounting and periodic reporting and audit of the Interest Rate Derivative exposures. The overall policy, risk management framework for the Interest Rate Derivatives are monitored by the Risk Management Committee.
21. Claims outstanding
As at March 31, 2024, there were 4,235 claims amounting to ' 318,529 thousands (Previous year ended March 31, 2023: 5,654 claims amounting to ' 494,677 thousands) settled and remaining unpaid for a period of more than six months. These claims remain unpaid awaiting receipt of duly executed discharge documents from the claimants. All claims are to be paid to claimants in India.
22. Provision for NPA (non standard and doubtful assets) for debt portfolio
Provision for doubtful debts is made In line with the 'Guidelines on Prudential norms for income recognition, Asset classification, Provisioning and other related matters in respect of Debt portfolio' as specified by IRDAI vide the Master Circular dated December 11, 2013, as amended from time to time, and has been recognised in the Profit and Loss account (Shareholders' Fund) and Revenue Account (Policyholders' Fund), as per below table:
30. Subsidiaries:
The Company has two subsidiaries, for which information is given as under:
i. HDFC Pension Management Company Limited ("HDFC Pension") is a wholly owned subsidiary of HDFC Life Insurance Company Limited and has been a licensed pension fund manager since 2013 and also licensed as Point of Presence (PoP) for distribution of NPS and servicing to public at large since February 2019 . It was granted license under the new Request for Proposal (RFP) by the PFRDA and was issued certificate of registration dated 30th March, 2021 to act as Pension Fund under NPS architecture. HDFC Pension has been a preferred pension fund manager and its Assets Under Management have grown to ' 76,955 crores as at March 31, 2024 (as at March 31, 2023'45,397 crores).
ii. HDFC International Life and Re Company Limited ("HDFC International Life & Re") is a wholly owned foreign subsidiary incorporated in Dubai International Financial Centre ("DIFC") as a Company Limited by Shares under the previous Companies Law, DIFC Law No.2 of 2009 on January 10, 2016 under registration number 2067. The Company has been designated as a Private Company under the Companies Law, DIFC Law no. 5 of 2018 as on the date of its enactment. HDFC International Life & Re is regulated by the Dubai Financial Services Authority (""DFSA"") and is licensed to undertake life reinsurance business. It provides risk-transfer solutions, prudent underwriting solutions and value added services, among others, across individual life, group life and group credit life lines of business. HDFC International Life & Re currently offers reinsurance solutions in the Gulf Cooperation Council ("GCC"), Middle East & North Africa ("MENA") region and India. The Company has been granted the Certificate of Registration to set up overseas Branch in GIFT City, IFSC (regulated by the IFSCA) for conduct of life and health insurance classes of business and has started operations in GIFT City in August 2023.
HDFC International Life & Re was assigned a long-term insurer public financial strength rating of "BBB" with a stable outlook by S&P Global Ratings in December 2018. Subsequently every year S&P Global Ratings confirmed the long-term insurer public financial strength rating of the Company, while maintaining 'Stable outlook.'In October 2022, S&P Global Ratings confirmed the long-term insurer Financial Strength Rating (FSR) of the Company, while changing the outlook as "Negative". In November 2023, S&P Global Ratings confirmed the long-term insurer Financial Strength Rating (FSR) of the Company, while maintaining the outlook as "Negative".
18. Long term contracts
The Company has a process whereby periodically all long term contracts are assessed for material foreseeable losses. At the year end, the Company has reviewed and ensured that adequate provisions as required under any law/ accounting standard for material foreseeable losses on such long term contracts including derivative contracts has been made in the financial statements.
For insurance contracts, actuarial valuation of liabilities for policies in force is done by the Appointed Actuary of the Company. The assumptions used in valuation of liabilities for policies in force are in accordance with the guidelines and norms issued by the IRDAI and the Institute of Actuaries of India in concurrence with the IRDAI.
19. IND AS Implementation
The Company had set up a steering committee comprising members from finance, actuarial and technology. The steering committee met at regular intervals to initiate implementation of IND AS standards. The Company has appointed an external partner to perform an initial impact assessment. The outcome of the Initial impact assessment was submitted to IRDAI within situpalated timelines. The Company is in the process of evaluating a technology partner. The Audit Committee and Board of Directors have been updated regularly in this matters.
20. No funds have been advanced or loaned or invested (either from borrowed funds or share premium or any other sources or kind of funds) by the Company to or any other person or entities, including foreign entities ('Intermediaries') with the understanding, whether recorded in writing or otherwise, that the Intermediary shall lent or invest in party identified by or on behalf of the Company (Ultimate beneficiaries). The Company has also not received any fund from any parties (Funding Party) with the understanding that the Company shall whether, directly or indirectly lent or invest in other persons or entities identified by or on behalf of the Funding Party ('Ultimate Beneficiaries') or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries.
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