New Delhi: The government has tried to pre-empt potential future spats between financial regulators by tweaking legislation governing the Reserve Bank of India (RBI), the Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Authority (Irda) in decisively ending a row between the capital market and insurance watchdogs.
An ordinance passed on Friday night also served to prevent a possible erosion in the credibility of the regulators and the government that could have resulted from a long-drawn legal battle to establish jurisdiction over unit-linked insurance plans (Ulips), a hybrid insurance product.
The ordinance handed jurisdiction over Ulips to Irda.
“We have learnt our lessons,” said a senior government official privy to the closed-door negotiations over the last two months on the row between Sebi and Irda.
The official, who didn’t want to be named, did not disclose details of the changes in the ordinance to the RBI Act, 1934, which will have to be cleared by Parliament in the monsoon session.
According to another person with knowledge of the developments, a section of the Sebi Act governing collective investment schemes has been amended by the ordinance with the insertion of a clause that such schemes will not include Ulips or any instrument that offers a combination of investment and insurance.
The sparring between Sebi and Irda over jurisdiction came to a boil on 9 April after the former passed an order against 14 privately held life insurers, saying that they would be required to take a prior approval from it before launching an Ulip scheme. Irda responded by asking the insurers to ignore Sebi’s order. The ordinance nullified Sebi’s 9 April order.
A senior finance ministry official had told Mint in a previous interview that similar conflicts could erupt between Irda and the Pension Fund Regulatory and Development Authority over regulating pensions, and between RBI and Sebi over exchange-traded credit instruments.
The primary cause for the friction between regulators is that the laws were framed in an era before hybrid financial products gained popularity, the official added.
“This question of regulatory coordination will arise as long as you have different regulators because financial markets are not bound by what boundaries you define by law,” C.B. Bhave, Sebi’s chairman, said in a recent interview to Indian School of Business’ magazine, ISB Insight’s spring 2010 edition.
The first official cited above, privy to the closed-door negotiations, said the finance ministry was convinced the existing regulatory coordination mechanism, High Level Coordination Committee on Financial Markets, could not help because it did not have quasi-judicial powers.
“You can’t have an administrative solution to legal problems,” the official said. “All the regulators draw their power from legislations.”
Along with the ordinance, the finance ministry has constituted a high-level committee under the finance minister to sort out turf battles over hybrid products. All the four financial sector regulators are a part of this committee.
Soon after the regulatory turf battle came into the open, the finance ministry brokered a temporary truce between Sebi and Irda and asked them to approach the judiciary to find a solution. The ministry decided to simultaneously work quietly on finding solution. The team constituted to find a solution was restricted and efforts were made to keep it secret, the official said.
Once Sebi approached the Supreme Court in the last week of April and entities other than the two regulators were made party to the case, the finance ministry moved fast to find a binding solution. With so many interested parties, the judiciary would have taken a long time, while activity in the insurance industry was slowing, the official said.
The law ministry was consulted on the turf war between Sebi and Irda and it concluded that any hybrid product with a in-built insurance component would clearly fall under Irda’s ambit. In the interim, Irda had taken a series of steps to clear the blotches from Ulips since Sebi’s order to ban these hybrid products. The threat of the “foreign hand” (in this case Sebi) was effectively used to push through reforms that would have been fought by the industry under normal circumstances.
The friction between the regulators has cut both ways in terms of reforms.
In a May interview with Mint, S.B. Mathur, secretary general of the Life Insurance Council, an industry body comprising Indian life insurers, criticized the fact that asset management companies are allowed to start their businesses with capital of a mere Rs10 crore and collect any amount of money.
To quash such criticisms, a Sebi committee has proposed to increase the minimum net worth for setting up a mutual fund from Rs10 crore to Rs50 crore.