Stepping in to protect the retail investors, the government on Monday allowed insurance companies to continue to sell unit-linked insurance products, virtually setting aside the Sebi order of April 9 that had asked the insurance companies to instead obtain an approval from the market regulator before doing so.
Finance minister Pranab Mukherjee issued a terse statement asking the Sebi and Irda to ?jointly seek a binding legal mandate from an appropriate court? for a final resolution of the regulatory role over who will control the equity exposure of the insurance companies. Meanwhile, the ?status quo ante? would prevail.
Mukherjee?s statement follows the impasse over the weekend on the most popular life insurance products sold in the country that accounts for 80% of the premium garnered annually. ?The chairman, Sebi (CB Bhave) and chairman, Irda (J Harinarayan) held discussions on the jurisdiction over Ulips. To resolve any ambiguity and to ensure smooth functioning in the markets?, the regulators will jointly approach the courts.
A finance ministry official said the regulators could approach a high court to resolve the matter. According to a former member of the High Level Coordination Committee on Capital and Financial Markets, who did not wished to be named, choosing the appropriate court could be tricky.
The Securities Appellate Tribunal cannot entertain insurance matters, while the Irda Act does not specify an appeals authority, it can appeal to the government. An Irda official told FE the regulator would move the Delhi High Court over the matter soon.
Financial services secretary R Gopalan said while the ministry would want Sebi and Irda to go to court as soon as possible, he cannot predict when the issue will be resolved. Life insurers?which are among the largest domestic institutional investors in the stock market–derive over 80% of their premiums from Ulips. These are basically investment products with their underlying as equity and debt, sweetened with a small life cover for the buyer. Total Ulip premium in 2008-09 was over Rs 90,000 crore. The regulators? spat has hit the stock market on Monday with the Sensex ending down 80.14 points or 0.45% at 17,853 points, despite reports of robust industrial expansion in February.
Irda chairman J Harinarayan reiterated on Monday his position that it was pertinent to continue with Ulips in the interest of policyholders and insurance companies. A visibly upset Sebi chairman CB Bhave, who on Monday kicked off a landmark initiative to disburse funds to investors that suffered losses during 22 IPO scams between 2003 and 2005, declined repeated requests for comments.
While it would not be very difficult for insurance companies to register with the Sebi and then sell Ulips, insurance industry executives are concerned that the registration could bring them under Sebi?s mutual funds regulations. Among other things, this would mean they cannot give hefty commissions to agents selling Ulips, since Sebi has reduced commission and other charges for mutual funds to almost zero. First year commissions in the Ulip business are usually over 30%, incentivising agents to dump mutual funds and sell Ulips. In its order, Sebi has argued that Ulips are more or less akin to mutual funds since they have an investment component. On Friday, Sebi banned 14 life insurance companies from selling Ulips until they obtain registration from the market regulator. Within 24 hours, Irda asked the companies to ignore the Sebi order and continue with business as usual. Sebi had first issued show-cause notices to insurance companies in January this year but the dispute has been hanging fire from 2005.