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