Unconventional it may seem, but the capital market regulator Securities and Exchange Board of India (Sebi) had kept the finance ministry informed about its controversial order on Ulips (unit-linked insurance products) eight days before issuing it on April 9. Unconventional, because Sebi is an autonomous regulator and is not required to inform the government about its proposed actions. The order barred 14 insurance companies from raising fresh money through Ulips.
Equally unconventional was the fact that the finance ministry was apparently not unanimous on how to respond. While the ministry tacitly accepted the Sebi position at that point, it subsequently put paid to the market regulator?s bid to have a say in Ulips by issuing an Ordinance on June 19 stating that these products will be governed solely by Irda.
According to sources privy to information, the need for an ordinance that appears to snub Sebi, and also allegedly impinges on the autonomy of banking regulator Reserve Bank of India, could have been avoided. ?Let?s say the department of economic affairs (which administers Sebi) and the department of financial services (that administers Irda) were not on the same page here. The finance ministry could have just asked Sebi to desist from issuing the order,? said the source, who did not wish to be quoted. ?Sebi would have desisted.?
Ulips are investment products similar to mutual funds, but include a small life cover component. They are being sold in India for almost a decade and are the primary reason behind insurance companies emerging as dominant players in the stock markets.
The order came about after the Insurance Regulatory and Development Authority (Irda) fought fiercely to protect its regulatory turf and Sebi stuck to its stance that Ulips being investment products needed to be under its purview. The two regulators, despite several bilateral meetings and those under the umbrella of the RBI governor-chaired High Level Committee on Financial Markets failed to resolve as to how Ulips could be better regulated.
When contacted, a government official confirmed that North Block was fully aware of Sebi?s April 9 action more than a week before the order was issued. The official said the ministry?s internal differences were sort of hurriedly papered over on June 19 (Saturday, a non-working day) to issue the Ordinance. Finance minister Pranab Mukherjee had, in May first week, called the chairmen of both Irda and Sebi for a discussion on Ulips. ?Even then, the advice was to resolve the issue through the legal process,? the official said, pointing out that the ministry was all along unsure about who should regulate Ulips.
Besides attempting to settle the Irda-Sebi row, the Ordinance also amended the Reserve Bank of India Act, 1934, Insurance Act, 1938 and Sebi Act, 1992 and the Securities Contract Regulations Act, 1956.
It set up a joint mechanism under the finance minister to resolve all disputes relating to regulation of hybrid products. This has, however, been strongly opposed by the RBI, which says that the Ordinance threatens its autonomy. It has hence asked the government to let the Ordinance lapse.