Fierce Fighting By Mumbai and Hyderabad!
Rama Krishna Vadlamudi, BOMBAY April 12, 2010
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A different kind of battle is being fought fiercely by the plucky Mumbai and the resilient Hyderabad teams. The brawl is about who should control the Indian ‘Premium’ League (IPL). Sorry guys! This is not about IPL – the Indian Premier League. The slugfest is about the battle for ‘Premium’ that investors pay for their investment in Unit Linked Insurance Plans being sold by life insurance companies. Well, the Mumbai-based SEBI and the Hyderabad-based IRDA are fighting an unprecedented turf war in Indian financial markets. This is about who should control ULIPs. ULIPs are basically savings products with a sprinkle of insurance. While about 95 per cent of the ULIP premium will be invested in equity markets, the remaining five per cent is set aside towards the life cover of the insured, that is the ULIP policyholder.
FLASH NEWS!
Meanwhile, latest news being flashed by the media is that the crisis about ULIPs has been resolved temporarily after the intervention of the Government through the Finance Minister, Pranab Mukherjee. The Ministry of Finance has devised a formula for resolving the tussle. As per the formula, SEBI and IRDA have agreed to decide the issue in an appropriate court, whose judgment would be binding on SEBI and IRDA.
The last word is yet to be said about the controversy. We can expect lot of fireworks in the next few quarters if not years in this regard.
What is the background to the row?
The latest row had started when SEBI had banned 14 life insurance companies from selling ULIPs a few days back. A day later, IRDA had directed insurance companies to ignore SEBI’s order and continue to sell ULIPs as usual. This had created a lot of confusion among millions of ULIP policyholders.
SEBI argues that ULIPs come under the purview of Collective Investment Schemes – this financial product is regulated by SEBI. SEBI’s contention has been that insurance companies should take its permission before launching any ULIPs. As the structure of ULIP is basically investment in equity markets, SEBI’s seems to be correct in its stance of regulating ULIPs. SEBI’s is on a good legal wicket as far as regulation of ULIPs is concerned.
As we have seen in the case of Exchange-traded Currency Futures (which were introduced in August 2008), two entities can regulate any financial product if there is an overlap. Both SEBI and RBI regulate currency futures market in India . Even in case of Exchange-traded Interest Rate Futures (which were introduced in August 2009), both SEBI and RBI are the regulators. As such, it would not be wrong to think that ULIPs can be regulated by both SEBI and IRDA.
Are our laws inadequate?
Ajay Shah, a veteran expert on financial markets from NIPFP, argues that more products may need to be brought under joint regulation. He argues that Government Securities, which are traded on NDS platform daily, shall be brought under the control SEBI.
We have one body called High-Level Coordination Committee on Financial Markets (HLCCFM) with representatives from several regulators, RBI, SEBI, IRDA, etc. This body is headed by RBI. This is supposed to resolve inter-regulatory issues.
New Initiatives by GOI
One initiative in the recent Union Budget 2010-11 is the proposal to set up a Fiscal Stability and Development Council to sort out any issues between the regulators of financial markets, like, RBI, IRDA, SEBI, PFRDA, etc. Let us hope that initiatives like these will bring more clarity on India ’s financial sector regulation in future.
Another important area that has been hanging fire for a long time is who should control financial conglomerates – which operate in all areas of finance from insurance, banking to mutual funds. RBI has been sitting on the framework for establishing holding companies for Banking Group.
The country’s biggest bank, SBI and ICICI Bank wanted to set up their own holding companies encompassing all its businesses, from banking, insurance and mutual funds. ICICI Bank wanted to monetize its insurance and AMC businesses. But, RBI and the
WHAT SHOULD INVESTORS DO?
Even though IRDA has taken a number of initiatives to curb the practice of mis-selling them, ULIPs are not suitable to many investors – simply put, they are bad products for most of the investors. In India , most of the individual investors are risk-averse; but, they have been sold these ULIPs..
Investors need not worry about the controversy between SEBI and IRDA. Things will take their own course in India . If investors understand the ULIP products well, they can continue to invest their money in ULIPs after assessing their asset allocation, risk appetite and suitability of the financial products. My personal opinion is that ULIPs are bad products despite some improvements in their structure in the last few quarters. It would be better if we avoid them at all costs.
Disclaimer: The views of the author are personal. Picture courtesy: Google
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