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Raj Kumar Makkad (Adv P & H High Court Chandigarh)     14 April 2010

BETWEEN REGULATORS

At the centre of the turf war between markets regulator Sebi and insurance regulator IRDA are financial products known as unit linked insurance plans (ULIPs). Unlike other products offered by insurance firms, ULIPs are essentially the equivalent of mutual funds (plus the insurance component), in the sense that the money committed by the consumer of the product is invested into equities markets, and not into safer avenues like government bonds. Sebi argues that since there is a large equities component in these, it has the right to regulate them. IRDA claims that since ULIPs are offered by insurance companies and have an insurance component (even if as little as 1 per cent), it alone has the right to regulate them.

 

The first way to view the IRDA/ Sebi difficulties with ULIPs is the question of consumer protection. Sebi has in the recent past clamped down on commission charged by agents for mutual funds products. So agents have a perverse incentive to sell only ULIPs because they still get a huge commission from the former. The existing arrangements clearly favour the interests of the salesperson and the insurance company. The second way to view the IRDA/ Sebi difficulty is to focus on legal issues. Courts are going to have to rule on whether products which have a 1 per cent insurance component should be exempt from Sebi rules about fund management products. Sebi has done well to pose this question in the public domain.

 

The third dimension is, how should the laws on regulation of fund management and insurance be structured? How should inter-agency coordination be achieved, since India is still a few years away from a single regulator with unified supervision of all financial firms? The IRDA/ Sebi complexities are only a harbinger of what the future holds, given a messy collision between the sophisticated financial system of a $1.5 trillion economy and laws drafted decades ago. In his Budget speech, Finance Minister Pranab Mukherjee announced the Financial Stability Development Council (a new effort on improving coordination) and the Financial Sector Legislative Reforms Commission (a new effort on translating recent expert committee reports into drafts of new and revised laws). Better coordination between regulators and an updated legal framework for the financial sector will help minimise disputes like this one.

 

 



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