Contrary to popular belief, SEBI’s clamp-down on ULIPs may not be of its own doing; the roots of the ongoing turf war can be traced back to the finance ministry’s thought process developed many months ago

The current full-blown turf war between the Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA) over the regulatory purview of unit-linked insurance plans (ULIPs) may have been silently stirred up under the roof of the finance ministry, much before the issue came to the limelight. While experts are sympathising with SEBI’s views on the indiscriminate mis-selling of ULIPs or IRDA’s legal jurisdiction (depending on which side their sympathies are), it appears that a section of the finance ministry is completely backing SEBI, which may have encouraged the capital-market regulator to go hammer and tongs at the insurance companies. SEBI, in a stunning order dated 9 April 2010, had banned 14 life insurance companies from distributing and marketing new ULIPs to customers.

Indeed, a series of presentations and papers by Dr KP Krishnan, the joint secretary (capital markets), before different gatherings since November last year suggest that the predatory incursion by SEBI has its roots in the finance ministry, much before it became a full-blown order. The papers and presentations explicitly highlight the urgent need to address the issue of hybrid products that ‘straddle’ and ‘impact’ different regulators. They openly call for the establishment of the Financial Stability and Development Council (FSDC) to improve regulatory co-ordination and resolve ‘cross-cutting issues’.

Moneylife had pointed out earlier (see here), that there was something amiss in this bizarre drama that is being played out between the insurance and capital market regulators. We were among the first to reveal that this was possibly a deliberately created crisis by vested interests in the finance ministry.

In a draft paper to be presented before the ‘Conference on South Asian Financial Systems at a crossroad: Promoting Stability and growth’ in November 2009, Dr Krishnan specifically highlighted the blurring nature of financial products. The exact text in the paper is: “Another issue is that much of the growth in insurance penetration is as a result of selling of products such as the Unit Linked Insurance Plans (ULIPs) which is essentially a mutual fund product.  The relatively better performance of ULIPs could be attributed, inter alia, to higher commission in insurance ULIPs than for mutual fund products. Thus, there is a blurring of products wherein financial instruments are partaking of multiple characteristics of investment, pension and insurance etc. Some changes in regulatory architecture would be necessary to address this, on which we focus later in the paper,” mentions the draft.

It is obvious that the finance ministry has been aiming for the creation of a super-regulator euphemistically called FSDC. The overlapping nature of investment-cum-insurance products offered by life insurance companies provided the right cause for the ministry to make a case for it. With SEBI providing a spearhead for spreading the finance ministry’s agenda, the issue has now been perfectly orchestrated from inside the corridors of power.

This explains the curious attitude of a seasoned politician like Pranab Mukherjee, the finance minister. The minister appeared helpless in resolving this tussle. The minister had earlier indicated that he is powerless to rein in SEBI, asking the two regulators to seek judicial help to resolve their differences. How convenient is it that the second most powerful minister in the Cabinet completely washed his hands of the matter? We now know why.

The finance ministry is refusing to come out in the open and admitting the role it has played in fostering this regulatory battle which it can control and dictate the outcome. Meanwhile, SEBI and IRDA have been left grabbing each other’s throats.