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Is the finance ministry's ‘move’ in the SEBI vs IRDA battle part of a strategy?

The finance ministry has finally stepped in to resolve the SEBI-IRDA spat, which threatened to destabilise the market. However, instead of directly intervening in the dispute, the ministry seems to have bought some time by telling the sparring regulators to go to court

After maintaining a deafening silence on the SEBI-IRDA spat over ULIPs, the finance ministry has finally asked the regulators to maintain the status quo till the matter is resolved by an appropriate court.

Finance minister Pranab Mukherjee told reporters on Monday evening, "To resolve any ambiguity and to ensure smooth functioning in the market, the regulators have agreed to jointly seek a binding legal mandate from an appropriate court.”

Instead of taking a firm stance on the whole issue—which would have well been within the ministry’s purview—Mr Mukherjee has preferred to maintain the status quo, thereby buying some time for the government.

Given the pace at which the judiciary moves in India, one can only hope that the issue does not drag on forever. It is likely that investors will now be forced to wait for a clear legal mandate before going in for unit-linked insurance plans.

Earlier, the finance ministry's failure to end the ridiculous turf war triggered by the Securities and Exchange Board of India (SEBI) of who should regulate Unit-linked Insurance Plans (ULIPs) suggested that its action had the blessing and approval of the government. If it did, then this was probably the ministry's way of cooling an overheated market, because there is utter confusion and panic among investors of the 14 private insurers barred by SEBI from accepting any new funds as well as the insurance companies. (These are SBI Life, ICICI Prudential, Tata AIG, Aegon Religare Life, Aviva Life, Bajaj Allianz, Bharti AXA, Birla Sun Life, HDFC Standard Life, ING Vysya Life, Kotak Mahindra Old Mutual Life, Max New York Life, Metlife India and Reliance Life).
 
The entire drama played out over the weekend. Late Friday night, SEBI issued a startling order barring 14 private insurance companies from selling ULIPs, virtually shutting down these instruments. It selectively kept out Life Insurance Corporation of India, which also issues ULIPs. Here again, those involved believe that it was as strategic move to keep out the largest, public sector player, which is important to the finance and disinvestment ministry. IRDA responded on Saturday night with its own clarification that "notwithstanding the SEBI order, these insurance companies can continue to do business as usual including offering, marketing and servicing ULIPS". 

The issue here is not ULIPs, where Moneylife has consistently argued that the costs and commissions are ridiculously high and there is rampant mis-selling. If the insurance industry has to be reigned in and forced to cut costs, it ought to have been done in a graduated and transparent manner, with a proper announcement about the changes. Instead, SEBI's action has signalled that the 14 insurance companies are running dubious schemes. With investors already battered by the frequent closure of long-term schemes (with an insurance element) like the Senior Citizens Unit Plan (SCUP) and the Rajyalakshmi scheme for the girl child, investors are naturally worried if their fat monthly investments in various ULIPs will be similarly jeopardised.
 
The reaction:
Yet, investors don't understand these nuances or clarifications—in fact, that is exactly why ULIPs have been mis-sold for a decade. The panic among investors is evident from various investment related websites and blogs. However, our question is, why have a High-Level Coordination Committee of regulators (which includes the Reserve Bank of India and the finance ministry), if this issue could not have been resolved at that level?

Also, it must be remembered that IRDA was set up long after SEBI came into existence and got its statutory powers, which means that the decision to set up IRDA was part of government policy approved by the Cabinet and Parliament. Can its turf be encroached on by the actions of another regulator without a policy discussion and announced policy change? 
 
History:
ULIPs are not new instruments that have suddenly begun to trouble the market regulator. They were launched exactly a decade ago, when the government opened the insurance business to private players. Each player entered the market with a global insurance major. It is also important to remember that the 14 insurers who have been barred by SEBI (prior to Monday evening’s decision), did not deliberately try to bypass the market regulator in structuring their products—they followed the laid-out regulatory procedure and each of their schemes, including their high costs and commissions were cleared by IRDA. By muddying the regulatory waters and making it a turf battle, SEBI is in fact making it difficult to push for much-needed changes in the cost and commission structure of insurers as well as the manner in which they are sold.
 
Long-term funds:
The government must remember that the insurance industry today is the only long-term source of funds in the market and possibly the only counter-balance to the huge investments by Foreign Institutional Investors (FIIs). If the hedge funds entering through the FII route, should choose to take advantage of the confusion among insurance investors today, then it is the finance ministry alone which will have to take responsibility for creating such an opportunity by failing to act decisively.
 
The sums involved, and the number of people affected, are huge. According to a source, the insurance industry collected Rs2,40,000 crore in 2009-2010. As IRDA says in its clarification, "In the year 2008-09, there were 7.03 crore ULIP polices involving a total premium of Rs90,645 crore in force. In the period 1-4-2009 to 28-2-2010, another 16.7 lakh policies have been sold with a premium of Rs44,611 crore".

How does the finance ministry justify the deliberate turmoil triggered by SEBI in the insurance industry, which is today the only big source of long-term money for investment in infrastructure development and other long gestation investments?
 
Will this be the norm?
We had earlier said that insurance companies would defy SEBI, obey their regulator and continue to do business. Our investigations show that all of them carried on business as usual, ignoring the market watchdog’s diktat.

Now both SEBI and IRDA will have to settle the matter in court. All these actions weaken the structure of independent regulators. This begs the question whether the turmoil unleashed in the markets is part of a deliberate and skilfully-orchestrated move by certain vested interests in the government to strengthen the case for a Super Regulator, which has already been announced in the form of the Financial Stability Board.

Although the finance ministry has assured the RBI and SEBI that the board will not destabilise them, maybe the bureaucrats working under Pranab babu have a different agenda. Most market persons including politicians who have watched the drama do not believe that SEBI would have initiated such drastic action and not been reigned in without the tacit support of the finance ministry.

For now, the status quo continues. But the battle between the regulators has far from died down, leaving hapless investors in the crossfire.

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COMMENTS

BODLA UPENDER

7 years ago

The SEBI & IRDA BOTH WERE LEFT AND RIGHT ARMS UNDER THE FINANCE MINISTRY. THE SELLING OF ULIPS IN THE MARKET GOING SINCE A DECADE AND CRORES OF THE MONEY WAS COLLECTED BY THE 14 INSURANCE COMPANIES HUGELY ON LONG TERM BASE WHICH WERE HELPED THE INFRASTRUCTURE OF INDIA. NOW THE QUESTION ARISE HOW THE SEBI & FINANCE MINISTRY HAD GOOD SLEEP OF VOILATION OF IRDA TO GET PERMISSSION FROM SEBI TO PROMOTE THEIR ULIP PRODUCTS. IT SEEMS IN INDIA THERE IS NO SUCH LAW EVEN WE HAVE THE SUPREME COURT. WHAT DEMOCRACY OF INDIA - ANY BODY CAN ABLE TO ARGUE WITH ME IN THIS MATTER. IT IS UTTER FAILURE OF FINANCE MINISTRY OF INDIA TO REGULATE THE FUNCTIONS OF IRDA & SEBI - IT IS QUIET SHAME FULL. I ADVICE AS A CITIZEN OF INDIA FOR THE WELFARE OF ALL INVESTORS - FIRST OF ALL THEY SHOULD FILE RELEVANT SUITS IN THE RESPECTIVE LOCATION CONSUMER FORUMS DRASTICALLY AGAINST THE INSURANCE COMPANIES IMMEDIATELY OTHERWISE THERE IS NO SUCH LAW TO CONTROL THESE TWO REGULATORS IN INDIA. WE ARE NOT UNDER DICTATORSHIP RULE. WE ARE IN DEMOCRATIC COUNTRY. AS FOR NATION'S INTEREST THE SUPREME COURT HAS TO TAKE UP THIS CASE IRDA VS SEBI AS SUMOTO TO DO JUSTIFY THE INDIAN ULIP INVESTORS & GIVE GUIDELINES FURTHER TO THE FINANCE MINISTRY. I THINK THE FINANCE MINISTRY HAVING LESS LEGAL KNOWLEDGE TO REGULATE BOTH IRDA & SEBI. THEY SHOULD DEPLOY MORE FINANICAL EXPERT JUDGES IN THE ULIP MATTER. A SUPERIOR AUTHORITY IS TO BE DEPLOYED &^ SETTLE THE ISSURE FOR EVER. ALSO ADVISE TO ALL ULIP INVESTORS FILE CASES AGAINST INSURANCE 14 COMANIES TO INSURANCE AMBUDSMAN TO SOLVE THIS ISSUE. IT TAKES LOT OF TIME. I WILL TRY BEST MY LEVEL TO MAKE JUSTIFICATION TO ALL ULIP INVESTORS. HOPE GOOD.

Kannan

7 years ago

Sad to note that your writers do not know the difference between "reining in" and reigning in".

Prof. Bajaj

7 years ago

Dear Mr. KR

Your panic is the biggest proof of your intentions.

We are not talking here about the market risk. Are you saying that there is no market risk in ULIP ??

Be it MF or Stocks or ULIP, market risk will exist everywhere.

What we are talking about is the non-transparent and high cost structure of ULIPs.

And talking about trails, trail is paid on the value created for the investor. It is not something snatched from what he has invested. Whereas in ULIPs, even before the money is invested, a big chunk is taken away ( I need not tell who takes away the chunk, your panicking comments are speaking more than you)

And after what is paid in ELSS, there is no trail commission for next 3 years. Unlike in ULIP, 40% in 1st year, 7.5% in 2nd and 3rd year. 5% from 4th year......and so on........

And why are you highlighting and comparing single premium ULIP only. Is it that you do not sell any other ULIPs ?? Is it that all the agents sell only single premium ULIPs ??

Just introspect and ask yourself, why are advocating ULIPs so hard ?? only for fat commissions ?? think about the innocent investors who got cheated.

Do not blabber about investors losing money in the market. Market risk is there for all these financial products. If after investing Rs. 100, the market falls and the value becomes Rs. 75 it is understandable, but what about from Rs. 100 only Rs. 45 is invested and the balance Rs. 55 goes into the wrong pockets. In that case, if the market falls , the Rs. 45 will go further down to Rs. 35. How do you wish to justify this ??


Anil Shah

7 years ago

There is lot of mis selling is carried out in ulip sell. Moreover banks & other corporate agents are mis using there position and selling the insurance products without giving any information to clients. This should be stopped immediatly.

ramesh b

7 years ago

as suggested, insurance commission should be stopped like MF,to remove evils of the ulip.
-rightly ulips rsemble MF,as it crashed equally in mkt meltdown,perhaps more.had the mkt did not recover,ulips would hv problem of existance.
-NPS model is better in ulip,as it is more shockproof in the long term

manoj

7 years ago

During the second world war, one of the trusted aides of Hitler, Goebbles said " Utter a lie a thousand times and it shall become the truth".

People in this forum who keep parroting the lines that "ULIPs are high cost product", "ULIPs are not investor friendly", " ULIPs are cheating people" etc and etc have mastered this art very well!!

The space available for me in this section may not be sufficient to dispel such untruths. I am giving my mail ID here: "[email protected]"

Those of you, who want to have a meaningful discussion on this may please mail me on this ID. I will certainly disprove this myth that ULIPs are high cost product!!!

Nagappan

7 years ago

Its hightime they stop taking the innocent investors for a ride by confusing them with too many charges which nobody cold understand. Small investors often complaint about the mis-selling of ULIPs and the negative returns associated with unrealistic & unjustified charges deducted. Lets bring in some transparency . . .

Pradeep Bhageria

7 years ago

It appears from the order that HLCC is on papers only and the confrontation between SEBI and IRDA has not been presented before HLCC.

If the finance ministry seriously wated to sort out the regulators row of issues, it could have issued a one line ordeer beforehand directing them to move court or any other such negotiator. But it has not happened so. Instead the issue has been made public, created a fear atmosphere in the investors mind and has made a mockery of the several regulators in place for a single finance portfolio.

SEBI has a lot more to do in the Stock market and MF industry for protecting investors interest..

kr

7 years ago

Dear Prof.

SEBI has enough to look in to MF scheme whose 10 Rs. unit value is hovering around Rs. 3 or less after three years of investment. Total money eroded.


Scheme name JM AGri,

Many scheme below offer price after three years.

Many compnay promiter run away.

Most stock are over priced even after approval from SEBI including that of Govt. Company.

What SEBI is doing for erosion of public money.

What happened in reliance Power Issue.

What action taken. People loose 50% immediately.

Single investment of ULIP is far cheaper than MF . All Person saying ULIP are expensive Please give example with data. So look at the choice. And flexibility and tax benefit.

ELSS still paying 2% ., 3% commission ULIP do not (it is maximum 2%) . ULIP do not pay any trail so commission is higher in case of MF it trail is counted.

Why SEBI is silent. TRAIL is on Total fund value and not first Installment.

Prof. Bajaj

7 years ago

Dear Mr. KR,

From your arguments, it is evident that you are not a investor but an insurance agent, trying to defend ULIPs by all means. The reason is very simple. ULIPs pay you fat commissions.

ULIPs, by the very structure, were never meant to benefit the investors. They were for the insurance companies to bag big money for themselves and for the agents.

I would like you to tell me the name of the mutual fund which was sold at Rs. 10 and the NAV was Rs. 3 later. Even if you compare the most tail-ender of the mutual fund scheme with the top performing ULIP, the ULIP will still lose the battle.

I agree that SEBI's action is not appropriate. Because it is only half the action. Insurers should not be allowed to sell ULIPs even after registering with SEBI. This is simply because, Insurers and IRDA are doing a planned murder of the Indian Investors, who tend to trust their friends and relatives if they are selling ULIPs.

The argument of ULIPs being in the market since last 10 years is also futile. Do you mean to say that we should not stop something going wrong just because it exists in the market since long. That ways, the entry load in mutual funds should not have gone. There was no need to put circuit filters on stocks as they never existed since a century. When we identify that some products are doing more harm than good, it is the responsibility of a prudent regulator to ban them. Since IRDA itself has become a puppet in the hands of Insurance companies, SEBI had to do the job.

By all means, SEBI has done a great job and the ULIPs should be banned forever.

DHANSUKH SHAH

7 years ago

GOOD,SEBI HAVE ATLAST TAKEN THIS STEP.SUCH BOLD STEPS SHOUL HAVE BEEN TAKEN VERY EARLY.STILL IT IS NOT TO LATE. PROCESS OF HIGH COMMISSION IN ULIP PRODUCTS,MIS SELLING OF PRODUCTS AND HIGH CHARGES ARE THE RESULT OF THIS EVENT.
WE ARE WITH SEBI,THOUGH WE DO INSURANCE BUSINESS.......

bharat gandhi

7 years ago

i feel that the irda-sebi spat may be sponsored at least in part by lic. otherwise lic being the biggest insurer should have been banned the first. also lic is the biggest seller of traditional policies as being the biggest and oldest the mortality cost are the lowest. obviously lic and its huge workforce would be the biggest beneficiary if ulips are banned. another case of govt protecting its costly workforce.

Harbinder Mehra

7 years ago

SEBI has done what it should have done long time back. IRDA is run like an association for the profit mongers insurance companies in India.The way ULIP are positioned and sold in India can be considered height of miss selling.ULIP are sold in villages of India as FD products by Insurance companies by having tie up with Nationalized banks.

SEBI has taken a long term view for the overall stability of market whereas IRDA move smacks of short term motives to protect insurance companies.

I think that for overall benefit SEBI's effort should be lauded and supported in every forum.

Ronin

7 years ago

The problem really is that the ULIPs have costs structures and sales peocesses that border on fraud. The MFs don't. And yet both compete for exactly the same rupee. IRDA has taken a role of promoting industry development like an industry association, rather than acting like a true regulator to see that players do not loot powerless customers. The real failure has been of IRDA governance. This could have been resolved by Finance Ministry by putting a better leadership into IRDA as well as mandating a harmonisation of rules between ULIPs and MFs (obviously by a joint comittee of SEBI-IRDA). Instead, we will now try and get executive work done by a judicial forum with delay and possibly suboptimal results. God help us.

ROOPSINGH

7 years ago

the status quo to be stored and sebi took back orders is a real setback to SEBI and its top brass-they have started acting like a dictator-to issue orders without any justification on its implications-SEBI can not justify its moves which it took for paralysing of mutual fund industry-SEBI in actuality is not bothered to see what stock exchanges and its brokers are doing-brokers are devicig new kind of charges to clients like ''intersettlement benificiarry charges ''when stocks are sold from pool acount of broker,my broking firm is not replying since last one month for these charges,even SEBI has not done anything to my complaint,i have sent ledger copies to moneylife teami wish they will help me to fight the broker with this issue,where the client of direct equity trading will go if such charges are levied,and why SEBI not doing its duty in resolving such complaints rather putting its nose in other products like MF and ULIPS.

NHB offers senior citizens a new reverse mortgage product

With the new reverse mortgage product, senior citizens have a real possibility of encashing the value of their homes, by getting a regular income from it, while still living in it until the end of their lives

The National Housing Bank (NHB), along with the Central Bank of India and Star Union Dai-ichi have launched a new Reverse Mortgage product, which, for the first time, offers senior citizens a real possibility of encashing the value of their homes, by getting a regular income from it, while still living in it until the end of their lives.

Reverse Mortgage (RM), as the name suggests, is a product for senior citizens. It is defined as an agreement by which a homeowner borrows against the equity in his home and receives regular tax-free payments from the lender. The property is assessed and the company offering the RM decides on a fixed monthly instalment to be paid against it, which includes interest on the loan against the property. The person going in for this product will continue to live in that home for his/her lifetime along with his/her spouse. On the demise of the homeowners, their heirs have the option of reclaiming the property by paying off the outstanding loan with interest.

This product is a boon in the post-liberalisation era, where senior citizens have suffered deterioration in their lifestyles, because most of their savings are locked in their homes; high inflation and volatile interest rates have depleted their other income. In a nutshell, RM is the exact opposite of a conventional mortgage.

The new product was introduced by PR Jaishankar, assistant general manager of NHB at a brain-storming session at Moneylife Foundation with over 20 of the leading NGOs working with senior citizens—including Dignity, Helpage, Silver Innings and the Family Welfare Agency—attending the proceedings.

Mr Jaishankar's presentation explained in detail how the new product was far superior to the earlier offerings. He said that this product, the Sud Life Reverse Mortgage Loan/Annuity Plan was being offered with Central Bank (of India) and Star Union Dai-ichi Life Insurance. He credited NHB chairman S Sridhar for his untiring efforts in structuring a product, whereby the risk involved is distributed between the bank and the insurer.

The value of the property is assessed at 60% for a 60-year-old and rises to 75% for a 75-year-old. Mr Jaishankar said that property worth Rs50 lakh can fetch a senior citizen anywhere between Rs34,000 to Rs50,000 a month, depending on the option availed.

RM has been a non-starter in India for several reasons. First, unlike in the US, the government does not bear the insurance risk or the property fluctuation risk. Consequently, there was a steep haircut on the value of the product and an inconsequential monthly payment to the senior citizen. 

There is also the issue of whether the government will gouge tax from seniors on the monthly income, even though the home asset is usually built out of post-tax savings. However, this issue is with the Central Board of Direct Taxes (CBDT) and should hopefully see a decision in favour of the country's elderly population.

Interestingly, while the capital value of a home is converted into an annuity over the homeowner's lifetime, the RM product ensures that the monthly income steadily rises as the senior citizen gets older. That is because the haircut on the property value is lower when the senior citizen is older, because life expectancy decreases.

According to Mr Jaishankar who authored this project, the benefits are going to be revolutionary.

The benefits will be as follows:

  • Life-time payments till demise of surviving borrower.
  • No repayments till borrower lives and occupies the house.
  • Single collateral; borrower liability not to exceed house value. 
  • Loan settlement through sale of house.
  • Heirs may repay through sale of house. 

Ergo, RM is beneficial for senior citizens who want a regular income to meet their everyday needs, without leaving their houses.

User

COMMENTS

INDRANSH GUPTA

4 years ago

I like your article. It is very informative. Thank you so much for sharing such priceless information. Hats-off to the writer. Keep on posting such nice articles. Thank you so much.

vilas rane

6 years ago

this is very good scheme introduced by nhb ,let me know the full details in this regards.

ml sharma

6 years ago

the scheme is appriciable but it is restricted to self acquired property it should be extended to ancister,s property too

jagmohan agarwal

7 years ago

Can we get e-mail for MrP.R.Jaishankar Or Mr Sridhar if they will entertain any mail

Abhijit Kanetkar

7 years ago

I have been following this issue since it was first mooted a few years earlier.The new changes when they happen r indeed very good news for Senior Citizens.
I have a query though.
Can the scheme be availed by a citizen who may have two residences , lets out one on a rental and mortgages the " let " property to avail of this benefit ? In other words he keeps getting a rental and the annuity. Possible ?
Please reply

M.R.Borkar

7 years ago

So far so good. But what happens to the surviving life partner? Who is equally in bad shape or may be in worst condition than the one who has passed away. I think it will take care of this if the house is converted to a joint ownership. In our society female member is hardly a owner of immovable property. Let us do a sample check of few co.op hsg sos and find out this.

SHANKER PAI

7 years ago

It is a great act on the part of central bank of india to start this Reverse Mortgage scheme. Its social value is immeasurable.
We at MAKE-A-WILL FOUNDATION would give general outline of the scheme to the needy.However the silvers need to make efforts complete the documentation.
SSPAI
MAKE-A-WILL FOUNDATION

Trason

7 years ago

Excellent idea!Whom to contact for further information

sudhier g sharma

7 years ago

well done boys, really a nice one for senior citizens, this will save them from a miserable life post retirement.
bravo man bravo

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