INVESTORS TO BENEFIT FROM REGULATORY FIGHT ON ULIPS

[Dr. Sanjiv Agarwal]

We are seeing the two financial market regulators- Securities and Exchange Board of India (SEBI) for capital markets and Insurance Regulatory Authority of India (IRDA) for insurance services at loggerheads since past few days over jurisdictional issue of Regulating Unit Linked Insurance Plans (ULIPs). Typically ULIPs are hybrid investment cum insurance instruments, popular amongst investors and as a long term saving tool offering life insurance, investment and tax saving.

Last week SEBI issued a order banning over a dozen insurance companies to continue with or launch new ULIP schemes without complying with regulatory regiments of SEBI as these were akin to mutual funds. On the other hand, IRDA directed all such companies to give no heed to SEBI Circular as they were being regulated by IRDA. Though the matter is now going to move to courts to decide on this jurisdictional issue, what remains yet more important is that investor's money should be safe, investment accounting and disclosures be transparent and that investors money ought to be channelised in appropriate investments with ofcourse, a cap on distributions costs incentives and commission. Also, there should be a parity between regulation of similar products falling under different regulatory frameworks.

ULIPs are considered a better investment option over a long period, say five years or more as compared to plain mutual fund options. However, ULIPs suffer from high premium allocation charge, policy administration charge, cost of high incentives and commission etc which certainly impact the overall returns on the basic sum invested. Higher charges imply that the net investable fund is significantly less than what you have actually invested. A Rs 100 investment may result in actual investment of just Rs 65-70 while the balance is eaten up by charges Also, since part of your investment goes to wards life insurance, the insurer will also charge some amount to cover policy administration costs which also goes from the fund corpus and is charged to investment returns.

Shockingly, unlike SEBI regulated products, transparency is missing here as NAV's does not reflect such costs. Therefore, the returns would be reasonable, if at all, only over a long period. For short term, ULIP investment is just not advisable as costs are going to be unreasonably high.

On the other hand, mutual funds offer varied investment options besides being transparent in costs and NAV calculation. Not only this, the costs (in the form of entry loads) are nominal (around 2 percent). From returns and liquidity point of view, certainly mutual funds are a better option. However, one needs to trade off between risk to life and returns. After all, we need to live to fetch the returns and enjoy it. None offers life. So let's enjoy the returns at least!!

While it is surprising that the two regulatory agencies have now decided to move the court jointly to resolve the jurisdiction over ULIPs, one wonders, why the Law Ministry and Ministry of Finance take a legal view and decide the issue once for all. The moot issue to be decided is whether ULIP is a security or not as defined in section 2(h) of Securities Contracts (Regulation) Act, 1956? Irrespective of who issues it - whether an insurance company or any other company, if it is a security, it is SEBI who should regulate and if it is an insurance policy, it is IRDA who must have a say. It is just like a company deposit which is not regulated by SEBI but by Reserve Bank of India or Ministry of Corporate Affairs who regulate deposits from companies and non banking finance companies or banks.

We also to need to look at the mandate and objective of the two legislative pieces i.e. SEBI Act, 1952 and Insurance Act, 1938. The regulatory agencies such as SEBI and IRDA are only arms and eyes of law and are bound by the law under which their existence survives. At times, the egos of people who man these agencies at helm may have a bearing on the functioning of the institutions but it can not be objectively allowed to overstep the legal mandate provided to them.

In the case of ULIPs and tug of war between SEBI and IRDA, do we really require a judicial intervention or a bureaucratic intervention is just to settle the dispute. It seems as if a proactive approach and intervention is called for at the two Ministries - Law and Finance. This will not only provide a right and meaningful direction to the ongoing crises but will also instill a dose of confidence amongst the 'regulated class' by both the regulators.

Going by the past experience, when Unit Trust of India (UTI) was made to abide by all regulatory compliances of SEBI, given its clout at that point in time, and the later falling in line with SEBI directions, the balance appears to the tilted in favour of SEBI.

The current episode also raises eyebrows on multi- regulatory regime in India and calls for a need to debate on single regulatory framework or a strong inter-regulatory coordination mechanism. If that happens, India will leapfrog towards good governance and socio- economic efficiency.