A Financial Services Appellate Tribunal may be set up soon to prevent a repeat of the unprecedented spat between regulators Sebi and Irda on whether insurance companies can sell equity-based products like unit-linked insurance plans (Ulips). On Friday, Sebi had banned 14 life insurers from selling Ulips, which was followed by an Irda directive on Saturday to these companies to ignore the Sebi order. Sebi supervises the capital markets in India, while Irda polices the insurance industry.
The proposal to set up the tribunal has been approved by the high-level coordination committee on capital markets, the apex forum of all financial sector regulators, which includes the Securities and Exchange Board of India and the Insurance Regulatory and Development Authority, among others. But the proposal was not implemented, since almost all regulators are unwilling to yield some of their authority to the tribunal. However, the Sebi-Irda dispute could lead to a change in that position, since it has the potential to unnerve investors who see regulators as an extension of the government.
As an interim measure, the two regulators could agree among themselves to define a threshold level of exposure for Ulips in the equity markets.
This means, if an insurance company sells a Ulip with an equity component which is less than the threshold, the same could pass muster as a pure-play insurance product. Others will need a certificate from Sebi.
On Sunday, Sebi confirmed it has sent a copy of its order barring 14 life insurers from selling Ulips without its approval, to the Life Insurance Corporation too. LIC is India ?s biggest financial sector entity with a market share of almost 65% in the life insurance market. K Vaidyanathan, executive director, Sebi told FE: ?The balance nine, (against whom no orders were passed on April 9), are a work in progress.? He explained that Sebi has sent copies of the order to these nine including LIC, ?for their reference and for taking corrective position?. At stake is more than seven crore Ulips with a total premium of Rs 90,600 crore as per Irda data for the year 2008-09. In 2009-10 (April ?February), the life insurance companies have sold almost 17 lakh policies with a premium of Rs 44,611 crore. The product accounts for nearly 80% of the premium generated in the life insurance market. The finance ministry may push through the proposal to set up a tribunal as the only way to resolve such basic turf issues to the satisfaction of all. Even as insurance companies on Sunday pitched for an intervention by finance minister Pranab Mukherjee, finance secretary Ashok Chawla said: ?We will study the two orders tomorrow and take a call on whether government intervention is required or not.? The government has otherwise very limited mandate to negotiate in the issue that has been hanging fire since 2005.
Ulips are basically investment products with equities as their underlying, to which insurers add a life cover. Sebi has said such investment products can be marketed only with its approval. Surprisingly, while the Sebi order has not impinged on Irda?s mandate to run the insurance market, the latter has intervened. It sent out a missive to the 14 insurance companies over the weekend to continue selling sell their plans. ?Policyholders (of Ulips) are assured that these policies are safe and secure and the matters arising out of the recent orders of the Sebi will be addressed expeditiously in the appropriate forum in accordance with law?, it said.