India’s stock market regulator, Sebi is worried that the advertising campaigns, some featuring celebrity endorsers, being run by insurance firms for their unit-linked plans (Ulips) appear to be modelled on mutual fund schemes with an insurance cover thrown in.
Sebi has brought this to the notice of the country’s insurance regulator, Irda, because it does not want Ulips, which involve a certain risk to the investor, to be portrayed as assured-returns schemes which come with an additional tax-saving benefit. Some ads being run by insurers tout Ulips as investments that “don’t sink” or investments that are “always up”. And celebrities who endorse such products include the former captain of India’s cricket team Kapil Dev.
“Ulips are different from mutual funds in that they offer some element of guarantee. If a scheme advertises a guarantee when there is none offered, then it’s a violation of norms,” said C.S. Rao, chairman, Irda. He added Irda would check if any Ulip scheme was positioned as an investment vehicle such as a mutual fund.
According to a senior executive at an asset management company, Sebi’s worries are justified. The executive, who did not wish to be identified, claimed several companies were indulging in regulatory arbitrage. “Insurance companies are taking advantage of the regulatory differences between the mutual fund industry and the insurance industry to collect money from the public in the guise of an insurance policy to invest in stock market,” he said. The executive pointed out that although investment guidelines were different for mutual funds and Ulips, their investment objectives were similar.
Sebi allows mutual funds to guarantee returns and the capital, as long as these guarantees are provided by the asset management company and its sponsors. Guarantees such as these caused huge losses to state- owned banks that had floated such schemes in the past. Most promoters of mutual funds are now reluctant to offer any guarantees.
Irda requires insurance companies guaranteeing capital preservation or returns to set aside capital to back any claims that may arise.
Many Ulips offer guarantees despite investing a large portion of the money they raise in equities. Insurers have been keen to boost sales of these products which can offer equity-like returns and compete with mutual funds. Sebi believes that since Ulips are similar to mutual funds in their investment objective, they should operate under similar guidelines. Mutual funds are barred from using celebrity endorsers.
Much like mutual funds, Ulips offer equity, balanced and fixed-income alternatives. But unlike mutual funds, Ulips can charge a first-year expense of up to 35% of the first premium paid by the investors while mutual funds are allowed a maximum expense ratio of 6% of the amount collected under a new fund offer (2.25% for open-ended schemes).