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Commentary

SEBI Hits Back: New ULIPs Can’t Be Issued

So there was a lot of drama after the recent IRDA-SEBI fight, which went all the way to Finance Secretary Ashok Chawla, and the FM Pranab Mukherjee announced that “there will be status quo” until a court determines who has the right to regulate what.

This is strange, no? A government that has the right to clarify right then and there, is asking regulators to go to court to determine their turf. All Pranab-da has to do is say “IRDA, shut the hell up” and make necessary notifications. Why the tail between the legs?

Oh, Pranab Mukherjee says he would like to see no-loads on all financial products. This is great and hopefully the SEBI-IRDA row will resolve to the point where ULIPs come entry-load-free.

SEBI hit back – the “status quo” only applies to current ULIPs, it said in an order today. New ULIPs will not be allowed.se

2. In terms of para 26 of the said [earlier] order, 14 entities have been restrained from issuing any offer document, advertisement, brochure soliciting money from investors or raise money from investors by way of new and/or additional subscription for any product (including ULIPs) having an investment component in the nature of mutual funds, till they obtain the requisite certificate of registration from SEBI. As per para 28 of the said order, the order shall come into force with immediate effect, i.e. from 09.04.10.

3. This is to bring to the notice of investors that SEBI has decided to keep in abeyance, till further notice, the enforcement of the above directions with respect to the ULIP schemes /products existing on the date of the order, i.e. 09.04.10. However, with respect to any new ULIP schemes / products launched after 09.04.10, the directions mentioned in the said order will be enforced as indicated therein.

4. The aforesaid 14 entities have been informed of the above decision separately.

Awesome. The fight is about commissions really – SEBI wants to make it an even playing field for everyone and IRDA cares only about their stupid industry who have fattened themselves on investors money and can’t think about how badly investors are scammed by ULIPs.

Go, SEBI. It’s going to be tough, but I hope you win this battle.

  • Anonymous says:

    >Agree broadly with the article, but,

    //This is strange, no? A government that has the right to clarify right then and there, is asking regulators to go to court to determine their turf. All Pranab-da has to do is say “IRDA, shut the hell up” and make necessary notifications. Why the tail between the legs?//

    disagree with this part.

    I thought about this, what is FinMin to do? Study the arguments on both sides, the legal and practical (economic, industry and consumer) implications and issue an instant ruling? Accept one party's argument in toto and issue a decree in favor of that? I don't think that the FinMin is setup to do that, and not at short notice.

    Like any good top level management, it delegated the responsibility to competent authority (in this case, correctly, legal) and restore status quo ante till the issue is resolved.

    One cannot make a serious argument that continuation of status quo is going to dramatically injure either party or the customer over the next few months. FinMin was in no way obligated to play to SEBI's timeline.

    Also, I have qualms about the way SEBI does its public engagments. For a body that speaks very assertively about transparency, how many quotes have you seen in the press from SEBI officials clarifying their order? Has there been an explanation on the absence of LIC in the first list?

    There have also been instances in the past where SEBI has issued circulars or notices with ambiguities and then not answered questions seeking clarity.

    I like SEBI, and all their recent investor friendly action. But let us not make them a paragon of wisdom and transparency.

  • Deepak Shenoy says:

    >Anon: Thing is – going legal won't help. A simple govt. notification will clarify. Even if the courts rule in one direction the government CAN change the concept in one notification! It really is the government's call, since the appropriate area is ambiguous in both acts. Courts will not solve matters – since it's ambiguous in the acts.

    The Government can make the call – if it needs time, so be it; but the FM can push it through. He's just not taking a stand (and saying he won't take a stand).

    I agree that SEBI has a lot of room to improve and that it has been lacking seriously as a regulator (for instance, lots of scams have gone uninvestigated) While I say that, in this case, I think SEBI is the right body to do the regulation and that all investments should be regulated by the same body (SEBI does MFs, Stocks, PMS; IRDA does ULIPs; PFRDA does NPS, there is EPFO and the PPF schemes. Better to work with a single regulator)

    But point taken, SEBI isn't the best; it's just the better of the two I think.

  • Arghya says:

    >I find myself having counter opinion with Deepak almost in all cases. But here in this case I would support him – Simply IRDA, the incompetent body should be dissolved and SEBI should be made central regulator for all investment issues. IRDA has completely failed to perform its duty. Nobody (people like us who use internet/Google is not real India) in India knows about the difference between Insurance and Investment. I know one of the top manager in Maruti(Gurgaon) who receives more than 2 lac@quarter as money-back from endowment policy from LIC. My father is running 4-5 such policies in the name of insurance-investments. And it’s very difficult to convince that it’s no one but Government(LIC) itself is robbing. Nobody but IRDA should be blamed for this. I think we should starts campaign to dissolve IRDA immediately.

    But I do think Pranab-da has done right thing. Yah, if he had taken decision right away in favor of SEBI it would have saved time but we also have to consider the collateral consequences. Irrespective of his decision all other parties would have immediately rejected it and would have made it an issue of parliamentary-hooliganism. I think it’s better in this way.

    Lets pray for SEBI, Lets pray for a better future.

  • Anonymous says:

    >I thought regulators were created so that Government won't interfere (where they don't need to). But who creates the regulators? Who ever that is must clearly draw the line of separation. I am not who that is in this case.

  • Venkata Desai says:

    >What I am not able to understand is does IRDA work for the industry (aka Insurance companies) or the policyholders. Hope SEBI's writ will prevail and investors full money is used for investment.

  • Niks says:

    >My guess is that SEBI is taking the right step. Insurance cannot be look upon for ROI and has to be more life cover specific. These insurance company agents have been fooling customers by promising very high returns on ULIP's

  • Sreeharsha says:

    >To understand why ULIPs are so popular, I will write why I almost fell for it.
    This happened a few years ago(stock markets were at their highest points), I had just started working and an agent form Bajaj allainze called me up. In spite of repeatedly saying I was not interested, he offered to meet me (at my office) and showed graphs of sensex going up 20% (minimum) yearly in the last 10 years. He asked me If I can invest Rs 1L for the next five years I will have about 1.2 crores in 25 years.
    Also, I will have 5L coverage from the time I sign-up for the policy.
    Thankfully I was not convinced and asked him to call after one month (the agent wouldn't agree for anything else). I went back home and asked my brother, who knew more about this. Then got a better understanding of things.Form that point I have kept my distance from ULIPs.

    There needs to be more awareness among people about ULIPs, the SEBI-IRDA tiff is the best thing that could happen at this time. This will at least make some people to look and read about what a ULIP is, before investing.

    After all everybody will not have a elder brother to guide on investments, they should at least know Deepak does online.

  • Anonymous says:

    >Dear Deepak,
    Please advise if this is the best time to get into Gilt Mutual funds or should I wait for yield touching 8.5 on ten year bonds.

    MK