The finance ministry brokered a temporary truce between the capital market watchdog and the insurance regulator, but left unresolved the issue of regulatory overlap stemming from hybrid products such as unit-linked insurance plans (Ulips) that combine equity and insurance.
Restoring status quo: A file photo of finance minister Pranab Mukherjee. Sebi chairman C.B. Bhave and Irda chairman J. Hari Narayan met ministry officials on Monday to help resolve their differences on Ulips. Ramesh Pathania / Mint
On Monday evening, after a day of discussions between the ministry, Securities and Exchange Board of India (Sebi), and the Insurance Regulatory and Development Authority (Irda), finance minister Pranab Mukherjee said that Sebi would set aside its Friday order targeting 14 insurers who have issued Ulips, and that both regulators would jointly seek a binding legal mandate on the issue from an appropriate court.
Mukherjee did not indicate a timeline for this.
“We are relieved that some clarity has emerged and it’s status quo ante,” said Rajeev Jhamkherkar, chief executive officer, Aegon Religare Life Insurance Co. Ltd. “We will abide by whatever resolutions come in the due course.”
The dispute between the two regulators stems from the basic incompatibility between long-standing regulatory legislation and recent developments in financial products, said a finance ministry official, who was a part of Monday’s negotiations and did not want to be identified.
The recent Union Budget tried to address the situation by suggesting reforms on the overarching architecture and attendant legislation, this person added.
As Irda chairman J. Hari Narayan walked into the finance ministry on Monday morning to take part in negotiations involving ministry officials and Sebi chairman, C.B. Bhave, he indicated there was a turf war on Ulips.
“I think we will have to have greater clarity on respective jurisdictions,” he told reporters.
Ulips are a combination of insurance and investment. The majority of the premium in a Ulip goes towards investment, and a fraction towards insuring the product holder.
Mukherjee’s Budget proposal acknowledged the potential pitfalls of lack of clarity on regulatory issues.
“Most of our legislation governing financial sector are very old. Large number of amendments to these Acts made at different points of time has increased ambiguity and complexity,” Mukherjee had said.
Mukherjee had suggested establishing a financial sector legislative reforms commission to rewrite and clean up legislation. He also proposed to set up a financial stability and development council to address issues between regulators.
It is not clear whether recent developments will fast-track the creation of this entity. The finance ministry official declined comment on this.
On Friday, Sebi barred 14 insurance firms from selling Ulips on the ground the instrument had an investment component which brought them under its purview. Sebi’s order asked the insurers to stop selling Ulips unless they got it registered with the capital market regulator.
Sebi’s move came after the two regulators had sparred on the issue for a few months. Once Sebi received legal opinion supporting its right to regulate the investment component of Irda, it issued an order.
Ulips have been the insurance industry’s blockbuster product.
According to Irda, in 2008-09, there were 70.3 million Ulips involving a premium of Rs90,645 crore. Between April 2009 and February, the insurance industry sold another 1.67 million Ulips which brought them a premium of Rs44,611 crore.
According to one finance executive, there are similarities between the investment component of Ulips and mutual funds, but a dissimilarity in regulation, which may have forced Sebi’s hand.
“In the way Ulips are sold, they are essentially investment products sold as insurance products and Sebi taking over (regulation of the) investment part is fully justified,” Parag Parikh, chairman, Parag Parikh Financial Advisory Services Ltd, said.
“Sebi has removed load from mutual funds and this is creating anomaly between the two products since agents are pushing Ulips which have a huge commission incentive,” he added. Parikh said that Sebi’s move would also ensure that insurers and distributors wouldn’t mis-sell Ulips.
Deepti Bhaskaran and N. Sundaresha Subramanian contributed to this story.