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ULIP handover lacks legitimacy

columns Updated: Jun 30, 2010 13:08 IST

Just what does the government's June 18 ordinance that has handed over the regulation of unit-linked insurance plans (ULIPs) to Insurance Regulatory and Development Authority (IRDA) tell us about India's democratic process? That it has been needlessly breached.

Two months ago, a regulatory war broke out when the capital markets regulator Securities and Exchange Board of India (SEBI) through its April 9 quasi-judicial order restrained 14 insurance companies from issuing any more ULIPs. SEBI's contention: since ULIPs are a collective investment scheme, they need to follow SEBI's guidelines that include zero commissions, low costs, transparency.

Curiously, the reply to this order came not from insurance companies but their regulator, the Hyderabad-based IRDA, who asked the companies to ignore SEBI's order and continue with business as usual — including a charge of upto 40 per cent first year commissions.

As the battle raged on, Finance Minister Pranab Mukherjee intervened and told both regulators to approach the Supreme Court for an opinion, pending which status quo was ensured.

But a June 18 ordinance — Securities and Insurance Laws (Amendment and Validation) Ordinance, 2010 — changed all that. In a nutshell, this ordinance amended four Acts of Parliament — Reserve Bank of India Act, 1934; Insurance Act, 1938; Securities Contracts (Regulation) act, 1956; and Securities and Exchange Board of India Act, 1992. Surely, managing a small regulatory tussle over a small product could have been handled better.

In his Budget 2010 speech, Mukherjee had proposed the setting up of Financial Stability and Development Council that was likely to be headed by him. Addressing such inter-regulatory coordination issues was one of its jobs. The ULIP issue could well have been resolved by it.

The solution is fairly straightforward. IRDA should regulate ULIPs — but take into account SEBI's concerns about the excessive and extortive costs and commissions that insurers and their agents charge from a financially illiterate nation.

The way they have been sold is a shame on IRDA and a sham on investors.

By bulldozing the amendments that have a use-by date of six months (Parliament needs to pass this ordinance before it
becomes law; else it lapses), the government has shown scant respect for the democratic process. Without adequate debate, using the crude instrument of an ordinance to fix something as sophisticated as a hybrid financial product shows there is something amiss.

My prayer to Parliamentarians: please understand how investors are being systematically looted by insurers under a benign IRDA before you vote for these amendments in the forthcoming Monsoon Session of Parliament. The issue needs more debate before it gets democratic legitimacy.