This was just waiting to happen. Really. While Sebi?s decision?unexpected in some quarters?to stop 14 major players from issuing new Ulips, and Irda?s instruction?arguably even more surprising?to these players to ignore the Sebi diktat have succeeded in bringing high drama to the usually staid world of financial regulation, the spat is actually the clearest pointer to the problems of the fragmented regulatory structure in India.
First, some basics. Ulips are time-bound insurance plans that invest the premium in stock market portfolios and let the insured benefit from the gains therein. The insurance cover aside, they are practically indistinguishable from mutual funds. Of course, as Sebi?s initial order pointed out, these 14 companies have shown as many ways in which Ulips differ from funds. But they do not seem to alter the collective-market-investment-vehicle nature of the Ulips. Additionally, the real motivation of the investor is also relevant. It is probably a rare individual that buys the product for its insurance protection?it is much more of a ?mutual fund with an insurance rider? rather than ?an insurance scheme with possibility of market gain?.
Ulips also happen to be the main driver of the insurance industry. The private insurance players have concentrated on selling Ulips that have accounted for 80-90% of their business in recent years. LIC has been somewhat slow to respond to this shift, but over time it too went the Ulip route in a major way, pushing the industry weight of Ulips to over 70% before the proportion dipped a bit in the wake of the equity market slump. So, there is no doubt that Sebi?s control over Ulips would practically cover much of the insurance industry?s new business. The stakes could scarcely be higher.
Further, as the Irda chairman observes in his order, the stopping of new issues of Ulips can land insurance companies in liquidity problems, jeopardising payments on existing policies underlining the inter-connectedness of the financial sector.
Sebi certainly has a point, but the manner of asserting its claim appears to be a bit brash. On the other hand, under the current system, there is no agency that would fix the issue, unless Sebi itself acted on it. The issue does not require any change in laws. Reportedly, Sebi had sought and obtained the Attorney General?s opinion on the matter. Sebi?s stand seems to mean that irrespective of who you are?insurance company or local investment club?if you are launching what looks like a fund and inviting the public to participate in it, you need to be registered with Sebi. The sector regulator?s permission to conduct business is immaterial. For Ulips, there is the additional issue of no entry loads. Irda?s standpoint is that insurance agencies can do whatever it has permitted them to do. As of now, there are no statutory mediators between these two tier-I regulators to settle the issue.
Who is right? The FM seems to have leaned towards Sebi making registration mandatory for new Ulips. The final decision is best left to the courts. But a related question is: why did things come to such a pass? The sensible and gentlemanly way of sorting this out would have been a discussion between the two regulators, which appear to have taken place without resolving the debate. The High Level Committee of Capital Markets has reportedly taken up the issue as well, again without much success. There just seems to be no mechanism to settle inter-regulator disputes. And financial products and institutions appear increasingly difficult to fit into narrow, rigid pigeonholes. The Rajan committee had pointed to multiple examples of regulatory overlaps, including those between Sebi and MCA about issuer companies; Sebi and RBI over FIIs; RBI and state governments over cooperative banks; and gaps like MFIs or financial planners and advisors. Each of them can mushroom into a crisis like this one.
Every cloud has a silver lining, though. This clash helps underline how much overdue is the Financial Stability and Development Council (FSDC) promised in the Union Budget. Issues like this are best settled behind closed-door meetings in an agency with statutory power and responsibility to make the final call. Conflicting diktats reduce the prestige of both the regulators. Early reports suggest that the FSDC?s sub-committee on regulatory coordination will be headed by the RBI governor. I am not sure if that is a good idea since RBI is a regulator itself.
With due sympathies for the deciding judge, the Sebi-Irda case should provide interesting arguments to delineate the powers between the regulators, something that the FSDC should also find useful. It deserves at least as much attention as the Modi-Tharoor duel.
The author teaches Finance at the Indian School of Business, Hyderabad