When was the last time a finance minister of India referred to UTIMF as UTI? Quite some years ago, one would think. The company imploded so badly in the summer of 2001, the offspring took a lot of effort and brand building to develop a new identity for itself to distance itself from UTI.
Be that as it may, it is also interesting to note how the government has again acknowledged that stock market-linked products can offer guaranteed returns. In the 2001 scam, it was a set of guarantees on market-linked products, led by the infamous US-64, that finally did the investors in, along with a clutch of similar products, which also perished simultaneously. It was then made very clear that a market-linked product could not and will not offer any guaranteed returns. The implication was that such guarantees were a misnomer and if the products became popular riding on them, the sovereign will invariably end up as the final stop. But now the insurance regulator has issued guidelines for Ulips, assuring a ?minimum guaranteed return? of 4.5% per annum or as specified by the regulator. So, insurance companies can now race among themselves to offer a higher return. If any of them trip, misjudging their investment, one wonders who will pick up the guarantee.
Besides, once the principle has been re-established, why shouldn?t a mutual fund or the plans under the new pension scheme offer a similar guarantee? The latter have not found too many takers and, surely, a guarantee could do wonders. One doesn?t know. Just an aside, the Prime Minister, no less, has told a different sector agency?the Employees Provident Fund?it is hurtling to a disaster by providing a guaranteed payout that has no connection with the logic of capital markets.
All this is happening when the Indian financial sector after years of mediocrity seems poised to graduate to the top league of global finance. Sure, Mumbai has not really taken off as an international financial centre with all the trappings that come with it. But because of the size of the Indian economy and its potential growth rate, movements in all aspects of the economy are now fodder for global investors. Its regulations, for instance, are up for inspection at the G-20 high table. This basically means the stakes are high.
To make matters worse, a furious fight has also broken out over who should take the numero uno position among the regulators. To recapitulate: the finance ministry in July issued a press note saying clearly that the controller for the popular Ulip products will be the insurance regulator, ending a dispute between Irda and the stock market regulator, Sebi, over who should run them. The order itself was surprising as the matter was sub judice, that too based on a finance ministry?s directive to the two regulators.
The bigger problem with the order is the way it introduced the concept of a financial super regulator in the matrix, which includes RBI, Irda, Sebi, PFRDA and the finance ministry. Not to mention the assorted self-regulatory organisations like the stock exchanges and the depositories. From now on, any product or policy that will impact more than one of the agencies will be vetted by this new body.
In principle, this has merits. The introduction of currency derivatives, interest rate futures and measures to deepen the corporate bond markets have got held up for long, as there is no arbitrator to resolve disputes over turf, like in cases between Sebi and RBI.
So, while there have been several articles in the pink papers debating the necessity of such a regulator, that is not the big problem. Instead, the concern is the way it has been rammed through. In a parliamentary form of government, the legislature does not concern itself if the concerned ministry has consulted its constituent agencies, before it drafts an ordinance or a Bill. So from the point of view of accountability, the finance ministry has stuck to the script. But the agencies in question are not mundane ones. RBI and even Sebi have a role that goes way beyond that of any other organisation working within the ambit of any ministry.
For an economy aspiring to become a leading global player, the spectre of the monetary authority?s power being clipped is bound to create tremors in the financial markets. An open admission by the Governor that he was not even consulted makes it worse.
At this stage, dissent between the regulators, including even those within the finance ministry, has reached such a level that it is impossible to guess which way these will pan out. One suspects the differences will be glossed over but at a cost. Perhaps the government could consider letting the ordinance lapse and then all the concerned agencies can start talking afresh, without egos.
subhomoy.bhattacharjee@expressindia.com