Saibal C. Pal
All the above cases/disputes are a combination of celluloid episodes and real life. They all have one feature in common – all of them could have been avoided. Another feature is each one is fought with the most unexpected opponent. While the first two matters are imaginary in celluloid, family matters taken to Court the third one is among the several cases filed by a State Government against another. The Fourth one is a dispute between two regulatory authorities, namely the Securities and Exchange Board of India (`SEBI’) and the Insurance Regulatory and Development Authority (`IRDA’) and while the former regulates the capital market, the latter controls the insurance sector. Dispute between SEBI and IRDA has raised hue and cry all around starting from the Government to the investors who find themselves trapped in the midst of the quarrel which has resulted in the filing of the fifth case as a public interest litigation before the High Court at Mumbai. The episode on Unit linked Insurance Plans (Ulips) started on 9th April, 2010 when SEBI issued notice u/s 11 of the SEBI Act, 1992 to the 14 life insurance companies namely, Aegon – Religare, Aviva, Bajaj Allianz Life Insurance, Bharti AXA, Birla Sun Life, HDFC Standard Life, ICICI Prudential, ING Vysa Life, Kotak Mahindra Old Mutual Life, Max New Life, Metlife India, Reliance Life, SBI Life and Tata AIG Life, banning them from selling Ulips. This surprised all particularly when the insurance regulator had approved the scheme.
It is important to understand Ulip which is a combination of investment in securities with the benefit of life insurance. The scheme is popular. It constitutes 90 per cent of the portfolio of the 14 insurance companies. Monthly premium collection from the Ulip scheme lauched by the insurance companies aggregate to Rs 5000 to Rs 7000 Crores. The ban on the scheme was a surprise for the investing public but the conflict is stated to have brewed for quite sometime between SEBI and IRDA which did not surface. On 10th April, 2010 IRDA reacted to the ban of SEBI on the Insurance companies and referred the notice as `misconceived without jurisdiction.’ IRDA Chairman, Hari Narayan immediately reacted to the ban of SEBI and made a statement that the insurers would be affected by it and it would disturb the financial stability. IRDA was served with the copies of the letters issued to the insurance companies. IRDA further issued a statement that about 7 crore Ulip-holders involving premium collection of about Rs 90,645 Crore would be affected. During April, 2009 and February, 2010 another 0.68 crore policies involving premium collection of Rs 44,611 Crore were sold. The 14 insurance companies having equity base of Rs 16,7281 Crore have sizeable investment portfolios.
Dispute between the regulators in respect of the 14 insurance companies commenced when SEBI drew attention of IRDA that the said companies were not permitted to access the market as the schemes were not registered with SEBI. On December 14, 2009 notice was issued to HDFC Standard Life. Further on January, 15, 2010 notice was issued to the other 13 insurance companies. Copies of the letters were served on IRDA also. On February, 10, 2010, IRDA replied to SEBI stating that Insurance companies are permitted to sell Ulips. Again, on February, 22, 2010 IRDA supplemented their earlier reply that ULIPs have mandatory insurance elements and they do not fall under SEBI purview.
IRDA Chairman, expressed concern on the ban by SEBI on Ulips and stated that it is likely to lead to:
i. forced premature surrender of insurance policies by the Ulip- holders, leading to substantial loss;
ii. complete drying up of revenue flows to the insurance companies, which would disrupt payment of benefit on maturity, death and/ or other admissible claims, putting the policyholders and the general public to irreparable loss; and
iii. financial position of insurers will be seriously jeopardized, thus destabilizing the market and upsetting financial stability.
Prior to the year 2000, insurance sector was under the control of the Government. Thereafter, the sector was opened to the private sector. In the year 1999, Insurance Regulatory Development Authority Act, 1999 was passed to establishment an authority to protect the interest of insurance policies, regulate, promote and ensure the orderly growth of the insurance industry for matters connected therewith or incidental therewith.
SEBI the regulator of the capital market permits and monitors Mutual Funds ( MFs) and other Collective Investment Schemes (CIS) . MFs and CIS are required to be registered with SEBI and comply to the regulations framed for them. ULIPs are similar to MFs with additional benefit of cover life of the policy holder through an insurance policy. ULIP is a combined product in which investment is by UTI and the cover is provided by a group policy from LIC and is in existence quite sometime and was a popular means of tax deduction u/s 80C of the Income Tax Act, 1961 much before the insurance sector was opened up to the private sector. After the private sector was permitted to do Insurance business in 2000 and life insurers started Ulip as an instrument. SEBI views Ulips as a of a mimic of MFs and therefore insurers are required to obtain prior approval of SEBI for the product. SEBI is set to bar more life insurance players, including LIC, from selling fresh Ulips unless their plans are permitted by SEBI. Market share of LIC in Ulip sale is 40 per cent being the highest among Life insurance companies.
Under the present circumstance it is important for the Ulip policyholders to know whether they should continue to pay their renewal premium. Ulip policy holders would be the worst suffers in the open spat between the regulators. SEBI officials, however, do not see conflict in the two regulators exercising oversight on players operating both these markets on the same product as anything to do with investment in the securities market require their approval.
The sudden public spat caused the Government to intervene and the Finance Minister issued a statement to check any adverse affect in the market so that the policyholders are not affected. To overcome the hurdle of the notice issued to the Insurance Companies by SEBI, the insurance companies have to challenge the same before the High Court. But one view is that SEBI notice being a quasi judicial order, can be challenged in the SAT only and appeal against any order of SAT lies only before Supreme Court ( S 15 Z of the SEBI Act). Regulatory turf battles were witnessed in the past but it has never quite come out into the open in the present manner. Since the stakes are high, interest of policyholders have to be protected from any damage. The securities market is bound to be affected as there is substantial investment in equities under Ulip by the insurance companies. Earlier SEBI drew the attention of LIC in respect of Ulips to which LIC responded stating that SEBI did not have the remit or jurisdiction to regulate Ulips.
Government needs to intervene decisively to end this dispute not only to resolve the spat between the two regulators but more so in the interest of the investors who have invested there hard earned savings. Further the amount invested involves several crores. On 12th April, 2010, the Finance Minister said: `To resolve any ambiguity and to ensure smooth functioning in the markets, the regulators have agreed to jointly seek a binding legal mandate from an appropriate Court. Meanwhile, status quo ante is being restored.’ SEBI on 13th April, 2010 issued a new order modifying its earlier directive and allowing the 14 life insurance companies to continue selling existing Ulips. However, the order states that no further new Ulip could be launched by them. But the second order of SEBI failed to impress IRDA who have in a statement gone to say that they will continue to approve insurance products as the products fall within the ambit of insurance regulations.
Policy holders have started hitting back. There is hue and cry all round. An investor in Mumbai has already filed a PIL before the High Court at Mumbai. Meantime, SEBI has already filed caveats before several High Courts including Supreme Court to fight their stand in the Courts. Legal eagles have gone on record suggesting filing writ by IRDA against the SEBI orders.
On 15th April, 2010 media carried the news that the spat between the regulators was a result of the ego clash of the two Chiefs of the regulators, C.V.Bhave and Hari Narayan. It is stated that the seed of the dispute was sown in August, 2009 when the market regulator abolished entry loads for MFs.
IRDA has refused to buy the argument that Ulips have an element of investment which is the domain of SEBI Accordingly SEBI should not have a say in such policies which are purely insurance. Whatever the regulators may say it must be understood that the policies in question are related to the public of this country and it should be ensured by the regulators that they are protected and must not suffer due to differences between the regulators. Regulators have been appointed to safe guard the interest of the investing public and there should not be any event which is likely to adversely affect them. It must be remembered that disputes leading to battles result in win or loss to one side but the issue is never settled by such win or loss to one side. There will be only destruction during the period the battle is fought. In this case the policyholders will be the sufferers. Further there will be no new investment putting the insurance companies in difficulty of running their operations particularly to meet their obligation on maturity. Iraq and Iran fought between them for 10 years but was the dispute between them resolved when peace was forced to be declared? Both the countries only faced destruction. In the movie Kramer Vs Kramer the husband and wife fought a divorce case and separated. The husband and wife fought severely for child custody giving reason that the custody was required for the benefit of the child. One side won the custody case but did the child benefit ultimately? The child lost the love and effection of his parents which is so essential for a child in the adolescent years. Ulip policyholders should not be made to suffer in the battle between the two regulators. In the interest of the country.
It is important for the Government to work out a method for a win-win situation for the regulators and the policyholders. Unless policyholders are protected their will be a turmoil in the financial market. It is significant that the Government should ensure clarity in the Acts governing the activities of the two regulators.
The Companies Act, 1956 was amended with effect from 13.12.2000 to insert S 55A to clearly bring out the provisions which are to be administered by SEBI and ROC under the Act to avoid double prosecution under two different Acts for a single offence committed. Article 20(2) of the Constitution prohibits double punishment for the same offence. In 1995 S 20A was inserted in the SEBI Act through an amendment which provided that no civil court shall have jurisdiction in respect of any matter or over any order of the Board or the Adjudication Officer. Due to the amendment all frivolous cases in the civil courts came to an end.
Unless the Government resolves decisively the dispute between the two regulators which resulted in the public spat the insurance sector and the investors in Ulip are likely to face huge financial loss. Protection of the investors’ hard earned money is of utmost importance.