There was an impression that finance minister Pranab Mukherjee had sprung a nasty surprise to many by delivering the controversial Ordinance that removed all legal confusion as to who would regulate the Ulips. The surprise was delivered on two counts: first, the finance minister suddenly decided that Ulip was a core insurance product and must be regulated by
Irda. Second, he chose to form a new committee of regulators under law to resolve all future disputes regarding hybrid financial products where there was jurisdictional confusion as to which regulator must have a decisive say.
Newspaper reports even suggested some officials of the department of economic affairs (DEA) were not kept in the loop in regard to the Ordinance, which came on June 18. The subtext of this suggestion was that the finance ministry itself was divided on the Ulip issue, with the DEA officials aligned with Sebi and the department of financial services (DFS), which administers banking and insurance sectors, supporting Irda. Since the Ordinance ruled in favour of Irda, it was assumed that DFS was in the loop and DEA ignored.
A closer reading of the sequence of events shows that Pranab Mukherjee, a stickler for rules, had followed strict procedures to arrive at his decision on the Ordinance. Even if you disagree with some aspects of the new law, where corrections are being carried out, the finance minister cannot be accused of not following due procedure. If anything, the finance minister was justified in being a bit disappointed that he was not made aware of the gravity of the Ulip crises by senior DEA officials.
For instance, it has now come to light that Sebi had sent a note to DEA officials well in advance that it was going to ban private insurance companies from selling Ulips, the decision which eventually precipitated the stand-off between Sebi and Irda.
The question to ask is why the DEA officials did not bring the seriousness of the matter to Pranab Mukherjee?s attention? Was there some other motivation on the part of DEA officials? Did they want a crisis to erupt between Sebi and Irda so as to generate a debate over the need for a more empowered inter-regulatory body such as the Financial Stability Development Council (FSDC)? If this was the plan, then things clearly seemed to have backfired on the DEA.
Pranab Mukherjee is too seasoned a politician to get trapped by bureaucrats. By passing the Ordinance, Pranab has killed many birds with one stone. For instance, it was originally envisaged that the FSDC would play a much bigger role and would also handle inter-regulatory disputes arising out of legal confusion over jurisdiction. Clearly, this role will now be handled by the new committee to be chaired by the finance minister. Pranab Mukherjee has also assuaged RBI by deciding to make the central bank governor the vice-chairman on the committee. All other regulators will be members, at one level below the RBI governor.
This shows Pranab is flexible and open to amendments which are sensible and rational. He has also said the new committee will step in as a last resort mechanism after the regulators and the high-level committee on capital markets are unable to resolve a dispute. This will keep the pressure on the regulators to amicably resolve all issues among themselves and not play into the hands of bureaucrats in the ministry of finance. There is some merit in the finance minister?s logic that disputes on market-sensitive financial products cannot wait for courts to resolve. They have to be quickly sorted out. The only criticism, somewhat valid, is that tomorrow some whimsical finance minister can become more proactive than is necessary. That may happen in a rare situation but there are enough checks and balances in the system to ensure no hanky panky is allowed.
As for the Ordinance itself, the law minister Veerappa Moily had endorsed an opinion in the middle of May drafted by law secretary TK Vishwanathan that the joint committee was the best way to resolve the Ulip and all such future disputes. The law ministry also considered whether the Ulip dispute could be resolved by using existing powers the government had under the Sebi Act and Irda Act. Vishwanathan officially concluded that it would be improper to nullify the Sebi order on Ulip, which had the effect of law, by another order. It could only be done by an appellate authority or the Supreme Court. This, of course, would have taken time.
The finance minister?s team, which included the DEA secretary Ashok Chawla, formally discussed the law ministry?s recommendation in early June. Later, Ashok Chawla officially endorsed the need for the new joint committee mechanism under law and moved the matter to the DFS for a formal drafting of the Ordinance.
This suggests that the Ordinance went through an elaborate set of procedures and discussions. It was not sprung as a surprise as is being suggested by sections of the finance ministry bureaucracy. It appears some serious turf games were indeed being played within the finance ministry over issues relating to financial products. For Pranab Mukherjee, they were just par for the course.
mk.venu@expressindia.com