The final verdict on ULIPs: has SEBI lost?

By Bharat Budholia, Juris Corp
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The five-month-long proxy battle between the Securities and Exchange Board of India (SEBI) and the Insurance Regulatory Development Authority (IRDA) has ended abruptly. On 18 June the president promulgated the Securities and Insurance Laws (Amendment and Validation) Ordinance, which states unit linked insurance products (ULIPs) are insurance products. So ULIPs and other instruments which provide the combined ‘benefit’ of insurance and investment have been brought within the exclusive control of IRDA. This looks like IRDA has had its way, but is that really so?

Bharat Budholia Associate Juris Corp
Bharat Budholia
Associate
Juris Corp

As described in our previous article (India Business Law Journal May issue), SEBI ordered (on 9 April) all insurance companies to register with it before introducing ULIPs. SEBI said this was because ULIPs, which have both investment and insurance components, were “securities” as defined in the Securities Contracts (Regulations) Act, 1956 (SCRA). As such ULIPs were to be regulated by SEBI.

The ordinance nullifies the SEBI order by amending several statutes: it inserts an explanation into the Insurance Act, 1938, to bring ULIPs within the definition of “life insurance business”; it amends the SCRA to exclude ULIPs from the definition of “securities”; and amends the SEBI Act, 1992, to exclude ULIPs, from collective investment schemes and mutual funds.

IRDA forced to change

Although the ordinance appears to back IRDA’s stand, other developments surrounding it are significant. IRDA has new guidelines that change how ULIPs are regulated. So while the lock-in period for ULIPs has been increased from three years to five years, a minimum premium paying term of five years has been set. IRDA has also mandated an equal distribution of charges during the lock-in period, which does away with the current practice of 100% front loading. In addition, the charges at the end of the fifth year are to be capped at 4%.

IRDA has also stipulated the minimum extent of risk cover in all unit linked plans. In addition it has come out with a draft on modification of regulations for protection of policy holders. It requires agents and brokers to prepare a “needs analysis” to ensure that products recommended are suitable for the policy holder. These proposed changes should significantly reduce instances of mis-selling of ULIPs.

Battle worth waging

So, has SEBI really lost the battle? The turf-war did force IRDA to at least act to curb mis-selling and reform the current structure and manner of selling ULIPs. While this may have been at the direction of the Ministry of Finance, it suggests that even the ministry saw why SEBI wanted to regulate ULIPs. If in the future IRDA regulates ULIPs effectively, SEBI’s primary goal would have been achieved.

SEBI’s mandate is to protect those who invest in securities while also working towards the development of the securities market. This is wider than IRDA’s, which is to regulate, promote and ensure the orderly growth of the insurance business.

More battles ahead?

It is pity the government didn’t use the ordinance as an opportunity to add the words “protection of the interest of policy holders” so as to widen IRDA’s mandate. It is interesting that protecting the interests of pension fund subscribers is part of the mandate of the Pension Fund Regulatory and Development Authority (PFRDA). Perhaps, a future turf war between PFRDA and IRDA will motivate the government to bring about such amendment.

New dispute resolution forum

The ordinance establishes a committee for resolving differences about instruments with components that fall under the jurisdiction of more than one regulator. It will be chaired by the finance minister and in addition to the heads of the regulators, namely Reserve Bank of India (RBI), SEBI, IRDA and PFRDA, will include the finance secretary and the secretary (financial services) in the Ministry of Finance. The committee will give its decision, which will be binding on all the regulators, within three months of a dispute being referred to it.

Given that those who decide on appointments (and renewal of terms) of heads of the regulators are on this committee, it is clear who will really have the final say. Also, an editorial in a leading financial daily expressed concern that this ordinance appears to be aimed at curbing the RBI.

It is pertinent to note a high level coordination committee on financial markets already exists to deal with inter-regulatory issues arising in the financial and capital markets. It comprises the heads of SEBI, IRDA, and PFRDA and is headed by the governor of the RBI. In addition, the union budget has proposed an “Apex level Financial Stability and Development Council”, which will have a similar mandate.

Bharat Budholia is an associate at Juris Corp, a Mumbai-based firm that specializes in banking and finance, foreign investments, private equity, direct tax, bankruptcy and restructuring, M&A, insurance, energy and infrastructure, dispute resolution and international arbitration.

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