April 11 : The Securities and Exchange Board of India has stirred a hornets’ nest with its order restraining 14 private insurance companies from raising further monies or subscription, new and/or additional, from investors for unit-linked insurance products till they obtain registration from Sebi.
According to Sebi, ULIP schemes are akin to mutual funds and therefore come under its purview. ULIP schemes are extremely popular with investors who go in for life insurance as it gives them returns on their investments over a longer period apart from insuring their lives. ULIPs account for nearly 70 to 80 per cent, if not more, of the revenues of insurance companies. According to Sebi, insurance accounts for just two per cent of the premium paid by investors taking life insurance. Sebi’s order will affect millions of investors, apart from the insurance companies, unless the latter immediately register themselves with Sebi.  Sebi says it sees no reason why there cannot be dual registration — namely with the Insurance Regulatory and Development Authority (IRDA), which is the regulator for the insurance industry, and with itself. There is no doubt that the insurance companies have been taken by surprise, and a nasty surprise at that, as the order was issued late on Friday night followed by the weekend holidays. There is also some ambiguity as insurance companies are not sure whether they should collect the next lot of premiums from their existing subscribers when they become due.
There has been a long-simmering dispute between Sebi and the IRDA as to who should regulate the insurance companies since they have ULIPs as one of their products. Each claims that it is the competent authority. In January this year Sebi made the first move to tackle the issue by writing to all these private insurance companies asking them how they had launched ULIPs without obtaining the requisite certificate of registration from Sebi, and why appropriate action should not be taken against them under the provisions of the Sebi Act. The companies replied in detail, giving 14 points as to why ULIPs were not in the same category as mutual funds. However, Sebi, in its order, dealt with each point and came to the conclusion that ULIPs  were like mutual funds and, since they involves investments in the capital market, the interest of the investor is at stake. Hence, Sebi reasoned, it has a role in protecting the investors and therefore the insurance companies should obtain Sebi’s permission to launch ULIPs and, of course, seek registration. One can now expect the companies to take legal recourse and also for IRDA to step in. The companies might also seek clarification from Sebi about some grey areas in its order. The order is not the end of the story but the beginning of a serious spat over issues of jurisdiction between Sebi and IRDA. There is, however, nothing new in disputes between regulatory authorities. In the past there were disputes even between Sebi and the RBI and there is always overlapping of jurisdiction. In this context, it seems that the government of India’s proposal to set up a Financial Stability and Development Council is not such a bad idea after all. This council, as Union finance minister Pranab Mukherjee explained in his Budget speech, would among other things address inter-regulatory coordination issues. Such a body would be able to get two regulators, in this case Sebi and IRDA, discussing the issue instead of pushing and pulling each other. The ultimate sufferers are the investors and the markets. It will be interesting to see how this dispute between the IRDA and Sebi finally works out. There is no doubt that Sebi already had a lot on its plate and has still a long way to go in monitoring corporate governance in companies. Monitoring insurance companies will be an added burden.