ULIP holders get Sandwiched between SEBI and IRDA war

However, that’s not the case to be over here. In the conflict between the country’s top two regulators – SEBI (Capital market regulator) and IRDA (Insurance
Regulator) – on the simmering issue of holding governing rights over unit-linked insurance products (ULIP) – a market linked insurance product; the government
has left the warring regulators to sort out the issue internally.

On Friday, the SEBI passed a stunning order of banning 14 life insurance companies involved in serving ULIP products, on the ground that they were
akin to mutual funds and may need to obtain registration from SEBI to proceed further with it.

The 14 insurers among the list of companies banned by the SEBI from selling ULIPs include

1. Aegon Religare Life Insurance Company Limite d

2. Aviva Life Insurance Company India Limited

3. Bajaj Allianz Life Insurance Company Limited

4. Bharti AXA Life Insurance Company Limited

5. Birla Sun Life Insurance Company Limited

6. HDFC Standard Life Insurance Company Limited

7. ICICI Prudential Life Insurance Company Limited

8. ING Vyasa Life Insurance Company Limited

9. Kotak Mahindra Old Mutual Life Insurance Limited

10. Max New York Life Insurance Co. Limited

11. Metlife India Insurance Company Limited

12. Reliance Life Insurance Company Limited

13. SBI Life Insurance Company Limited

14. TATA AIG Life Insurance Company Limited

ULIP is saving-cum-investment product that offers the option of life cover along with market liked returns. These products are increasingly gaining popularity
among the investors on account of its multi-purpose catering of life cover and equity market linked returns both. Additionally, they also provide Tax savings, so
they could very called All-in-One Policies.

However, SEBI’s contention is that ULIPs are not pure insurance products and such products are coupled with investment products which fall under its purview of
regulation. The investment component of the ULIPs, which ultimately finds its way into the equity markets, is in the nature of mutual funds which falls under the
jurisdiction of SEBI’s governance.

However, the spat does not end over here. In a reaction to the SEBI order, IRDA retaliated on Saturday by invoking its power under section 34(1) of the
Insurance Act, directing insurance companies to disregard the order from SEBI and proceed further with their business as usual.

As pointed out at the start of this post, the parent should come ahead and resolve the issue if the fight is getting out of bounds among the two children. A drama
involving as important an issue of conflict as this requires a prompt redressing from the highest quarters as the Finance Ministry or even the PMO, where stakes of
gullible public are involved due to no fault of their own.

he spat between the top two regulators is invoking a comical sequence of events in front of the world regarding the misplacement and dichotomy
aspect of the Indian law. The tragic drama initially involved a ruling passed by SEBI authorities under the SEBI Act. However, the same ruling has been
subsequently quashed by the IRDA under Insurance Act.
The spat between the SEBI and IRDA could adversely impact the interest of policyholders and insurers if the uncertainty prevails for a longer period of time. The
coming week could pan out as a high voltage event if the regulators continue to take potshots against each other and in the process sandwich the sentiments of
policyholders.

SEBI V IRDA – Unfolding Turf War

1. INTRODUCTION:
The feud between the two regulatory authorities, in the aftermath of sebi’s ban on ulips, has turned out to be quite a sensitive topic. In the recent days, that has, as ever so,
come to be ballooned by the media into a sensational one. In that, the media has dutifully arisen to the occasion, and in its own inimitable style, spared no pains but given the
widest possible publicity to the new found hot topic with zeal and in a feverish pitch.
In the common perception, it is simply a ego war; not a turf war as dubbed, wrongly so, in some quarters.
2. The million dollar (multi crore rupees!) question, which possibly should have been nagging anyone’s courage of conviction, is: Should not the individual as well as
common interests of the investors/insured, being the stakeholders, have been given the topmost priority and unreservedly weighed with the government and its regulatory
authorities in taking a rightful decision, to the end of finding a fittingly binding solution to the stalemate. That could have been accomplished, without procrastination, had they
cared to realize that, after all, it is the fundamental right of an investor to invest in any such marketed product, so long as it has been duly registered with the appropriate
authority – herein it is irda. As, according to the individual stand of both sebi and irda, what they so caringly are fighting for is wholly for safeguarding/ protecting the very same
interests of the investing public.
3. Ever since the row started brewing, there have been views and counter views given a wide publicity. Anyone who has been closely following up could not have failed to take a
note of the mutually varying facets of the controversy set in motion.

The stance of sebi, to be more precise- the premise on which it appears to have proceeded with issuance of the ban order, seems to be that, – its authority to issue any such
order is unquestionable. The reasons stated and reiterated by sebi, as understood by one, are:

It is the and the only authority, which has been vested with exclusive powers to regulate the business in stocks and any other security markets. And, ULIP, in any of
its varied avatars, is a product (or is it ‘commodity’- within its meaning as used in the law on income-tax?) with more of investment content than its insurance
content; hence a ‘security’ falling within its jurisdiction.
In this context, it needs to be pinpointed that, contrary to the impression sought to be created during the recent debates, there appears to be no clear-cut definition or definitive
guideline. For that matter, a search on the web is sure to make one realize that the term ‘security’ has no uniform but has varying meanings for different purposes. Besides, one
has really failed to appreciate as to why, or sees no sense in – the term ‘investment’ being liberally, as if it means or refers to one and the same concept or equilaent to
‘security’. In short, any clinching ruling on the basic issue namely, – as to whether or not ULIPs could be categorized as ‘security’ within the meaning, especially   for the
purposes of the SEBI Act itself is, it seems, quite likely to be fraught with insurmountable difficultly; hence, likely to lead an inconclusive finding.

4. Going by, rather placing reliance on the market news in public domain, the indelible impression one is left with may be narrated thus: The holders of ulips, even in the wake of
the ban order, are not known to have expressed any serious concern or anxiety. By and large, they have seen no reason to panic, much less to be so provoked as to doubt their
own prudence in having and remaining invested in ulips.  In other words, the holders of ulips mostly, left unto them, have not lost their faith or confidence in the soundness or
usefulness of having or remaining invested in ulips. On the contrary, as reported in  the press, (see Business Line, issue of 13th April – inter alia under  – ‘policy –holders jam
insurance agents’ phone lines’) – the holders of ulips have become apprehensive and been making discreet enquiries only because of the scare that the ban order came to
precipitate in their minds.
5. For getting a glimpse of irda’s reactions, the press reports, in Economic Times, etc., narrated below, may be useful:

When contacted, R Kannan, member, irda, said: Ulips are internationally sold by insurance companies and not by any other segment of financial services. They are
a composite insurance product, but the investment is shown separately because the investment risk is borne by the policyholder.
This product is structured as per international practice and is well within section 2(11) of the insurance act.
While the particular section in the Act recognizes life insurers’ right to sell such products, sebi probably feels the schemes that generate a return on investment are
similar to collective investment schemes, which come under its jurisdiction.
6. According to a view, regardless of the other issues raised and debated, the following are the most fundamental ones that need to be focused on:

A)      Whether or not sebi has, in issuing the ban order, acted in excess of its powers as a regulatory authority?

B)      Do not the reactions of the investors as given publicity in the media go to conclusively establish that the ulips have, for tax and other considerations, been found by them,
rather they have no qualms about the ulips being a safe and sound investment?

C)      If the answer to B) is not but positive, should not sebi have, on its own, without any qualms or further procrastination, decided to and withdrawn the order in toto (though,
has since been modified to some extent) as in fructuous or ab initio void?
In a nutshell: The all comprehensive issue requiring a conclusive finding is this:- Whether sebi was, in exercise of its powers as ‘regulatory authority’, by any logic, right in
interfering in the marketing of any product, duly registered with an appropriate independent regulatory (or any other authority), – despite any other consideration; particularly, its
inherent composition – that is, whether it is a combo – that is, a two-in-one or more than one – which has been permitted to be marketed?
7. In the common perception: Every regulatory authority, in acting on, or reacting to, in any such matter, mostly opts to confine itself to its rules and regulations (the ‘rules’) so
framed as to take care of only the interests of the given sector coming within its purview. Such ‘rules’ are invariably framed in a manner that they address themselves to and
meet only the ‘parochial’ concerns of the players in the sector the authority is expected to govern. For obvious reasons, and as a matter of conventional practice, the most of
such rules are not necessarily founded on any ‘principle’ -in its profound and idealistic sense, from a socialistic point of view. The inevitable consequence is, in the event of
being faced with a conflict of interests, such as herein, – a conflict of ego or turf war, or any other term one can think of – each authority strives and sticks to its own gun,
ignoring or bypassing what the other authority has to say, – ‘come what may’. So much so, the rules as also the steps taken by each one of them on a seemingly peremptory but
impulsive basis blatantly tend to overrule or bypass the most vital objective they are expected to serve or sub serve namely,  – the larger interests of the investors.
8. As has been observed in some quarters: Both regulators have been vociferously professing that their ultimate objective is to protect the interests of the investing / insuring
public. If that were truly so, then why the feud, is all the more confusing. Also, the finance ministry, besides the law ministry, has taken a recalcitrant and indifferent attitude, and
tacitly refused to intervene and resolve the issue. Had it been otherwise, as was widely expected, and brought about a serious dialogue between the two regulators, so that a
solution could have been surely found.

9. It has been pertinently asked in a thought provoking published article:  Is litigation the only way to save the stakeholders’ interest?  One is provoked to counter and in turn
ask: Should not the only sensible answer to the poser be – most certainly, litigation is ‘no way’ – at all?
For justification, one should recall what the apex court had to say, rather strongly recommend, to the government / its authorities, in the matter of all such  internal / in-
house disputes. In its judgment handed down in the often-cited ‘ONGC’ case, the court has made a clean breast of its unequivocal reservations and reactions, and its clear-cut
opinion.
10. In the ONGC case, the dispute pertained to issue(s) arising between the public sector undertaking and the tax – central excise – authorities. It was in that context that the
court was constrained to express its strong opinion against the propriety, and the manner, in which the central government and its public sector undertakings were fighting their
litigation in the courts by spending money and wasting public time. The court’s   direction was addressed to the cabinet secretary to handle the matter and report to the court as
to why the litigation was being conducted “when the two sides are public sector undertakings under the union of India”. In response, the cabinet secretary reverted to admit that
the government respected and accepted the views expressed by the court. What ensued thereafter went to suggest and make one and all believe that instructions were being
issued from time to time to all the departments of the government of India as well as to the public undertakings of the central government to the effect that, – all disputes,
regardless of the type, should be resolved amicably by mutual consultation or through the good offices of empowered agencies of the government or through arbitration;
thereby, a recourse to court litigation should be eliminated.

Now, turning to the current dispute between the two regulatory authorities, the referred  opinion of the apex court, in one’s perception and strong conviction, has prima
facie relevance; is rather, for obvious reasons,  of more relevance. Should that be the premise, the investors / insured are left with no clue but have been kept wondering as to
why, – the feud was to be moved in court; thereby, forcing them also into court litigation.
The sad commentary is that, – in case the government had the will as warranted, it certainly could have found ways and means to bring this mindless war to an abrupt end.
Especially, had the concerned ministries chosen to effectively intervene, without overlooking the commitment made to the apex court in the above-referred ONGC case.

11. According to a media report, irda had opposed the idea of sebi’s move to have the jurisdictional issues resolved “through the hearing of pils’; it was of the opinion that they
(pils) addressed “consumer interest issues rather than conflicts regarding jurisdiction”. The referred opinion of irda, to put it in the least offensive manner, deserves to be
taken, not with the proverbial just – a pinch of, – but with a few pinches of salt. As, such an outlook, prima facie runs counter to the common conception that, – in any
democracy, government, so also its authorities,  is believed to be of, and owes is very existence to – ‘the people’ and only   ‘the people’. Unless, of course, for what one does not
know, the very basic concepts of – ‘people’ and ‘public interest’ have, as many other concepts, lately undergone a rudimentary change.
KEY NOTE: Sebi, as lately reported, has moved the Supreme Court pleading for transfer of the several pending cases relating to ulips from different high courts to one court.
After having heard, the court has issued notices to – the centre, the irda, 14 insurance companies impacted/aggrieved by the ban order, and petitioners of two public interest
litigations. The indication is – the matter is slated to be further heard on the 8 th of july.
To conclude:
At the end of the day, the doubt lingers on: – Should not the regulatory authorities have acted prudently, in deciding to move the court on the subject controversy; and should not
the government on its part have played an active role, instead of choosing to remain a ‘mute spectator’?

If looked at objectively, that is from the viewpoint of the stakeholders, there is no gainsaying that, – had the apex court’s incisive observations and recommendations in the
landmark ONGC case not been lost sight of, hopefully, a different course of action would have come to be followed.

How the Sebi-Irda war affects your money

the fight between two regulators, Securities and Exchange Board of India (Sebi) and Insurance Regulatory and Development Authority (Irda), took an
ugly turn when Sebi banned 14 insurance firms from selling or advertising unit-linked insurance plans (Ulips) through quasi judicial powers vested in the
capital markets regulator. Refuting the ban, the insurance regulator waved a green signal to the companies, asking them to continue selling.

The two regulators have been at loggerheads on the issue of regulating Ulips, which are investment-cum-insurance products that deploy your money in
the stock and bond markets, for some years now. With each passing phase, the war gets messier. While insurance firms continue to sell Ulips after a go-
ahead by Irda, both the regulators were pushed into a room in the North Block to sort the fight out. It has been decided to take legal approval on who
regulates the investment part of Ulips, until then it is business as usual and insurance companies can continue to sell Ulips.

Caught between this war are the policyholders and we bring answers for them. Whatever the result may be, your money will remain safe. Continue to
stay invested in your Ulips. Such phases of intense disagreement only signal the onset of long-awaited financial reforms.

Sebi’s agenda

Ulips essentially marry two products: insurance, akin to a term plan, and investment, akin to a mutual fund (MF). While as a package, Ulips have been
regulated by Irda, Sebi now wants insurers to get registered with Sebi before going ahead with further sales.

Their logic in doing so: “The attributes of Ulips launched by insurers are different from traditional insurance products and they are a combination of
insurance and investment. The attributes of the investment component of Ulips launched by these entities (the 14 companies) are akin to the
characteristics of MFs. The investment component of Ulips is subject to investment risks associated with the securities markets, which are entirely borne
by the investors. This establishes conclusively that Ulips are a combination product and the investment component needs to be registered with and
regulated by Sebi,” says the 9 April notification.

While this may seem like a turf war as of now, moving ahead, joint regulation will place India at par with global best practices, besides bringing
uniformity in the way financial products are priced and sold. Says Veer Sardesai, chief executive, Sardesai Finance, a Pune-based financial planning
company: “Ulips have not been regulated the way they should be. Very little premium goes toward insurance charges and, hence, Sebi has a point when
it says that it wants to regulate the investment side. Irda has done little to control mis-selling among insurance products and if Sebi steps in and
addresses the issue, it is just fine.”

The MF industry, which bears the brunt of a strong distribution network of the insurance industry fuelled by huge commissions, moved to a no-load
structure in August. In response to Sebi’s notification in this regard, Irda capped the charges on Ulips in a way that the overall charge structure could not
bring down the gross yield by more than 225 basis points for a tenor of at least 10 years. But capping does not address the issue of huge commissions—
up to 40% of your premium in the first year. The industry estimates the average commission to be around 18%, which would mean Rs18,000 out of an
investment of Rs1 lakh is lost. This, against zero commission in a MF, is a huge incentive for agents to push Ulips.
By bringing Ulips under its purview, Sebi seeks to do away with the anomaly in distribution and address the issue of mis-selling. Says Sanket Kawatkar,
head (risk and consulting services), Towers Watson, a consulting firm: “There will be no problems if life insurers are allowed to invest in MFs. For MFs,
this would mean getting retail money and for a life insurer it would mean borrowing the expertise of the MF industry.”

Irda’s view

Sebi’s move has not gone down well with Irda, which is determined to regulate both the insurance and investment parts of Ulips.

Irda chairman J. Hari Narayan says: “Ulips are solely regulated by Irda, which has clear guidelines on its distribution and investment. Ulips have been
around for almost a decade now. Why has Sebi suddenly woken up to claim regulation over Ulips?”

He says: “Irda has issued (guidelines to) these companies, who were served a notice by Sebi, to continue selling. If Sebi wants to claim jurisdiction over
Ulips, it first needs to sort out the matter in a competent court of law. Once their jurisdiction is established, they can issue such directives.”

For insurers, it is business as usual with Irda giving them a go ahead. Says Paresh Parsnis, principal officer and executive director, HDFC Standard Life
Insurance Co. Ltd: “We believe at this point we will not be penalized since Irda has given us the authority to sell Ulips and insurance is regulated by Irda.
We have not stopped the sale of our Ulips.”

HDFC Standard Life was the first company to face a notice from Sebi for its pension plans, which had a zero insurance component.

What it means for you

Although this regulatory tussle may have left you on tenterhooks, you need not worry. Your money is safe. Your policies will not lapse and even if Sebi
were to regulate the investment part of the product, you would only gain in terms of lower costs and greater transparency.

Says S.B. Mathur, secretary general, Life Insurance Council: “Renewal premiums can’t be stopped as that would mean lapsation. However, this is a slow
period in the industry. Sale will remain minimal for the next two to three weeks.”

Money Matters recommends that you keep your money in two baskets. Invest through a mutual fund and insure yourself through a term plan—the pure
life insurance product. Also, to know how the war between the two regulators will unwind, watch this space.

SEBI-IRDA Row: Personalities shape IRDA-SEBI turf war

When insurance regulator J Hari Narayan and Sebi chief CB Bhave met over Mughlai food at the Grand Kakatiya hotel in Hyderabad last month, little could they
have imagined that they would be locked in a very public spat a few weeks later. 
But locked they are, as the long festering issue of which one of them oversees Unit-Linked Insurance Plans, or Ulips, offered by insurance companies has
ballooned into a big dispute, providing the investing public with a rare spectacle of a fight using official notifications. 

But the spat over which of the two regulates the much-fancied Ulips did not begin on April 9 at 10 pm, when market regulator Sebi banned 14 insurance
companies from selling Ulips. 

Mr Hari Narayan, who heads the Insurance Regulatory and Development Authority (Irda), promptly asked insurers to ignore the order. 

As investors, insurance companies and markets were left confused and nonplussed, the finance ministry stepped in to broker a quick settlement on Monday. But
that has proved to be short-lived, leaving the government’s crisis manager for all intractable issues, finance minister Pranab Mukherjee, with another problem to
resolve. 

The seeds of the Sebi-Irda dispute were sown last August when the market regulator abolished entry loads for mutual fund schemes. But hardly anyone could
have expected this to culminate in this very public spat, which is being increasingly shaped by the strong personalities. 

Officials at both regulators emphatically deny it’s a clash of egos, but no one denies it is a turf war that is being shaped by strong but, on this occasion, opposing
convictions. Both Mr Bhave and Mr Hari Narayan declined to comment for this story. 

During the second week of March, Mr Bhave flew to Hyderabad for a meeting with Mr Hari Narayan and a few bureaucrats from the finance ministry in New Delhi
also joined them to settle the turf battle over Ulips. 

At that meeting, it was proposed that to create a level-playing field between insurance companies and mutual funds, the Irda would be the prime regulator of Ulips,
with the insurance part of the product supervised by it while Sebi oversees the investment parts. 

But Irda refused to buy the argument, since it has been mandated by law to regulate insurance companies, even though they invest in stocks. And Sebi stuck to its
guns that since the funds are invested in stock markets, it can be treated as collective investment schemes, which fall under its purview. 

A major bone of contention is the hefty commissions paid by insurance companies — as high as 45% of the first-year premium and has led to distributors
recommending Ulips to investors over mutual funds’ schemes — to agents. The insurance regulator says the problem has been addressed with a cap on Ulip
charges. 
Irda had clearly said it had “no intention” to vacate the space, said a person familiar with the discussions in the meeting. 

It was not the first meeting between the two regulators — both sides have been discussing the issue since January but have failed to reach any agreement.
ULIP battle between SEBI, IRDA may batter stocks

Stocks of Indian companies may take a knock in the near term unless the government steps in swiftly to resolve the stand-off between the two regulators Sebi and
IRDA on the issue of selling unit linked insurance plans (Ulips), as a large chunk of funds raised through such plans are invested in equities. 

Brokers and fund managers expect share prices to fall on Monday considering the growing flow of insurance money into the Indian stock market. Local insurance
firms invested close to Rs 62,000 crore in equities in fiscal year 2009-10, of which unit linked insurance plans accounted for roughly Rs 50,000 crore, according to
insurance industry estimates. 

These are gross estimates that is they do not take into account shares sold by insurance companies. Data has to be collated from industry estimates as Sebi does
not provide a break up of insurance firms’ investments into equities. A sizeable chunk of the premium collected by insurance firms through Ulips are invested in
stocks, unlike traditional insurance plans, which predominantly invest in government securities and debt. LIC is the largest domestic institutional investor in
equities, having pumped in close to Rs 50,000 crore during the last fiscal. 

LIC has also been one of the biggest investors in Initial Public Offerings and follow on offerings of state run firms but the money which has been invested in such
issues have been primarily from its term plans. So to that extent the bar on Ulips should not impact its future plans to invest in upcoming IPOs. 

Ulips are one of the major sources of money in stock markets, says Asit Kumar Nayak, senior manager (insurance product and branch sales) at ICRA online, an
information services and database provider. “A ban on Ulips could cause a liquidity crisis. Such a move could suck out a lot of money from the markets,” he
added. 

Over the last couple of years, Indian insurance firms have quietly emerged as a force comparable to foreign portfolio investors or FIIs who have a significant
influence on the course of the markets here, given the funds at their disposal. In January-March 2009, for instance, Indian insurance firms pumped in $2.5 billion
even as foreign funds were dumping stocks across the board, and cushioned the fall to an extent. In all of calendar year 2009, FIIs invested close to $17 billion. 

“Sebi’s ban will impact insurance companies and the market alike,” said the chief investment officer of a private insurance company. “We will have no money to
invest in equities if we don’t sell Ulips. The problem will be even worse if we are met with unforeseen redemption. In the absence of fresh investments, we’ll be
forced to sell stocks to repay investors,” he added. 

Irda wins battle against Sebi

Round two of the spat between Irda and Sebi has gone to the former. An ordinance passed late last week hands over the control of Ulips to Irda;
jurisdiction over these hybrid products will now clearly lie with the insurance regulator. To remove any kind of ambiguity, the government is also
understood to be amending portions of the Sebi Act, relating to collective schemes, such that these will not include Ulips or any other schemes that
combine investment and insurance. This is not confirmed yet but that’s clearly the way forward; dual reporting can be a terrible thing and the last thing
we need is for mutual funds and insurance companies to be confused about who they’re regulated by and investors getting jittery about their savings.

By amending the legislation, which needs to be ratified by Parliament, the government is putting an end to unseemly squabbles between financial
regulators. Indeed, the manner in which Sebi passed an order, in April this year, asking 14 private-sector life insurers to take its permission before they
launched any new schemes, was quite shocking. It’s true that Ulips are nothing but mutual fund schemes with an added element of an insurance cover
whose risk cover is limited to a minuscule share of the premium. But the capital market regulator could have called for a white paper on the subject or
initiated some kind of discussion on who should be regulating Ulips.

While Sebi and Irda squabbled, the High Level Co-ordination Committee on financial markets (HLCC), chaired by the RBI governor, didn’t really do
much; watching helplessly since it doesn’t have executive powers. The HLCC could have looked into the commission structures for Ulips in order to
ensure a level-playing field for financial intermediaries but didn’t really come up with any ideas. However, it seems unlikely now that this committee will
get teeth since a high-level committee, to be headed by the finance minister, and comprising the RBI governor and heads of Sebi, Irda and PFRDA, is
to be set up. That has been in the offing—the Financial Stability and Development Council (FSDC) was announced some time back. Ultimately, it
doesn’t really matter which committee has the powers, as long as nothing falls between two stools. What the FSDC must ensure is a level-playing field
across financial instruments; Irda has allowed agents to charge exorbitant commissions of anywhere between 20% and 40%, at the cost of investors.
The mis-selling, too, needs to be stopped.

Irda has been talking of bringing down commissions on Ulips, but just bringing them down is not enough; they need to be brought down sharply, given
that entry loads for mutual funds are now banned. Life insurers, too, need to bring down their expenses and this needs to be monitored the way costs
and mutual funds are tracked. So far, it would seem that Irda has been a rather liberal regulator while Sebi has been a strict one. This is evident from
the kind of money that life insurers have been able to pick up from investors; in 2009-10, they are estimated to have mopped up some Rs 2.6 lakh
crore as insurance premium and four-fifths of this was accounted for by Ulips. In contrast, mutual funds have seen outflows from equity schemes in all
but three in the last 10 months since entry loads were banned. In the last one year, barely Rs 3,000 crore have come into equity schemes; total
AUM in equity schemes is just over Rs 2 lakh crore.

This clearly has to change and while Irda has made the right noises ever since Sebi attacked its turf, it needs to do much more. It has already brought
down surrender charges and upped the risk cover, and there is talk that life insurers will offer guaranteed returns so that those investors who are willing
to settle for lower returns, have a choice. Pension funds have to be bundled with either a life cover, health cover or annuities. Also investors in Ulips
need to have access to a variety of investment options; for instance, life insurers could offer them Index Funds. If commissions come down, then
premium collections will also come down. However, since there will be some commission, Ulips will be pushed more than mutual funds. It’s possible
that because the government wants the state-owned life insurer not to lose out, too—it has yielded ground to private sector players. Had the jurisdiction
of Ulips been handed over to Sebi, and commissions been done away with, LIC would have suffered. So, in that sense, it’s fine that Irda will supervise
Ulips. This is possibly the best solution. But the FSDC needs to keep an eagle eye on what is happening, otherwise investors will lose out.

Implications of the SEBI & IRDA issue for Financial Planning

In my opinion we are going to see far-reaching long-term consequences once the SEBI-IRDA issue gets resolved for Financial Planning profession. I
base my fact & assumptions that SEBI is on a strong wicket rather than IRDA. However we need to go to the origin of this situation. In this article we
will see what exactly is happening at this moment between SEBI and IRDA over ULIP ban and whats its implication on financial planning . Also
Read : A short guide to Hire a Good Financial Planner in India
What is SEBI & IRDA issue all about? How it actually originated?
The IRDA was formed before SEBI and with the help of IRDA insurance companies came out with aJugaadu product called ULIP which is just
identical to MF with one minor difference that apx.2-5% of a clients investment goes to provide a life cover and rest is invested in either market,
Govt. Securities, corporate debt or Equity, depending on the mandate of that fund. Now the second part is nothing but just like a mutual fund
scheme.
Where is the problem now?
There is no problem with it as 90% of insurance premium world over goes to market or securities. However, in India the ULIP products
become terrible investment products because if one invests Rs.100 in a ULIP then 20% of your money goes into commissions and approx. 2% into
insurance, only 78% of one’s money is invested in market or securities. So to get back to 98 ( 100 –2 ) it would take in normal market conditions at
least 2 years in Equity oriented funds and 4 years in debt oriented funds. So all you are doing is just recovering your principal in next 2 to 4 years.
Now, themiss-selling by an insurance agent gets hidden in the bull run and because of rampant financial illiteracy even among so called highly
qualified professionals & corporate executives leave alone the advisor selling the ULIP, the investor is fooled into putting more money in these bull
runs saying that your money will double in “x” years and in the bear runs when the ULIP loose even their principal, the advisor gives them a either
long term talk or plays on the investor fear and switches them to another products. Hence, an advisor in India is the a true definition of an
“opportunist”. In the bull run he plays on the “greed” of the investor and in the bear run he plays on the “fear” of the investor.
What the above does is that apart from loss to investors it gives an unfair advantage to insurance companies compared to mutual fund houses where
commissions are in fraction of your investments. What is the incentive for an advisor or even big distributors like banks & distribution companies to
sell MF schemes when they have the option of selling a similar scheme where they gets heavy commissions… as an agent what would you do go for
Rs.20/- commission on ULIP or Rs.1 on Mutual Fund Scheme on an investors investment of Rs.100/-.

Now, taking stock of the above problem SEBI has gone for an eagle eye’s view of the whole problem and to create a level playing field among all
market participants.After a lot of cajoling & convincing IRDA which failed to budge, SEBI issued the harsh step of issuing an quasi-judicial order
restraining Insurance companies from offering ULIP without proper registration with SEBI.

What will happen now?

Though there is likely to be a stay on the SEBI order given the large number of clients who hold ULIP products by the high court. This can be a
short-term breather to insurance companies but it is not a long-term solution.

Who is on strong wicket when the issue goes to Court – SEBI or IRDA?
Mr. Bave is a master strategist, he knew that the lobby of insures is very strong and united and it will take him years to bring them to negotiating
table. With the powers conferred to him by parliament, he issued a quasi judicial order.

Now, quasi – judicial order is such that even Mr.Bave cannot revoke it. The IRDA may win a temporary relief in this war, but SEBI stands on a
strong footings as in the court of law the court will go where investor interests remains. Insurance companies must see the larger picture and rather
than worrying about loosing valuations post an unfavorable order, they must prepare them self to change with the times.

What are the implications of the SEBI & IRDA issue for Financial Planning profession?
 So lets come back to the question what’s in it for Financial Planning profession ? In my opinion, realizing the investors interest the court will rule in
favor of SEBI, post which Insurance companies will have to bring down the commissions to Mutual Fund level on ULIP’s.
Is this is a good news for Financial planners?
Yes, but how many of us are changing as fast as the opportunity provided by structural changes effected by such orders? Time & again it has been
proved that great opportunity lies when you have big structural changes in an economy. Every century gives some opportunity during financial
turmoil and this time we are in the midst of such an opportunity.

RDA asks insurance companies to ignore SEBI order

New Delhi, Apr 11 (PTI):

Insurance regulator IRDA has taken SEBI head on by setting aside a ban on ULIPS by the market watchdog and asking 14 life insurance
companies to continue their business as usual.
The finance ministry has opted to keep a safe distance from the ongoing controversy.

Unit-linked equity products (ULIPS) are insurance plans sold by life insurers where the money collected from consumers is invested
into equity and debt markets and returns are linked to the same. Regulation of ULIPS has a bone of contention between the two
regulators.

Moving swiftly within 24 hours of Sebi order, IRDA Chairman J Hari Narayan in a signed order has asserted that it is IRDA which will
control the ULIPs, which are issued by the insurance companies.

Earlier on Friday, SEBI had banned 14 life insurance companies, including those belonging to the Tatas, Reliance Anil Ambani
Group, SBI, ICICI Bank and HDFC, from issuing Ulip products.

SEBI Chairman C B Bhave while speaking to reporters in Kolkata on Saturday declined to speak on the ban on 14 insurance
companies from selling Ulip without its approval.
"I am not going to comment on the order," he had said.

The Securities and Exchange Board of India (SEBI) in its Friday evening order had also said that entities registered with SEBI could operate such schemes as
they are in the nature of mutual funds.

Even as the two regulators continue the turf war, Finance Secretary Ashok Chawla distanced himself from the controversy saying it was a matter between the two
regulators. "It's a matter between regulators, so they have to decide."

The turf war concerns the nature of ULIPs which account for over 50 per cent of the total life insurance business in the country.

As on March 31, 2009, the total funds under the management of life insurance sector stood at over Rs 9 lakh crore of, accroding to the Life Insurance Council's
figure.

The life insurance companies against whom SEBI passed the order are SBI Life, ICICI Prudential, Tata AIG, Aegon Religare Life, Aviva Life, Bajaj Allianz, Bharti
AXA, Birla Sunlife, HDFC Standard Life, ING Vysya Life, Kotak Mahindra Old Mutual Life, Max New York Life, Metlife India and Reliance Life.
IRDA's order, however, will provide some relief to these life insurance companies. 

The order issued by SEBI banned 14 insurance companies from issuing "any offer document, advertisement, brochure soliciting money from investors or raise
money from investors by way of new and/or additional subscription for any product (including ULIPs) having an investment component in the nature of mutual
funds, till they obtain the requisite certificate of registration from SEBI."

Withing 24 hours of the SEBI's director, insurance regulator IRDA fought back with its own order that said, "all the 14 insurance companies which are mentioned in
the order of SEBI are directed to note that notwithstanding the said Order of the SEBI, they shall continue to carry out insurance business as usual including
offering, marketing and servicing ULIPs in accordance with the Insurance Act".

Describing the action of SEBI as "wholly misconceived and without jurisdiction", IRDA said it would have brought the insurance industry to a "stand still" seriously
jeopardising the interests of the policy holders and the interests of the insurers.

It would have resulted in "complete drying up of the revenue flows to the insurance companies which could disrupt the payment of benefits on maturity, on death
and on other admissible claims, putting the policyholder and the general public to irreparable financial loss.

"The financial position of the insurers will be seriously jeopardized thus destabilizing the market and upsetting financial stability", IRDA added.

About 7.03 crore ULIP polices involving a total premium of Rs.90,645 crores were in force in 2008-09. As many as 16.7 lakhs policies were sold with a premium of
Rs.44611 crores during April-February 2009-10.
Several discussions at the High Level Committee on Capital Markets, a forum for inter-regulatory coordination, have failed to yield results either.