Author : VS Warrier
Unit Linked Insurance Plan (i.e. ULIP) is a Scheme combining benefits of Life Insurance as well as Investment in the stock market. In ULIP, part of the premium amount is paid towards Life Insurance while the rest (after Administrative Charges) is invested in the Stock Market. Therefore, ULIP provides the financial safety as well as opportunity for wealth creation.
After formation of Unit Trust of India in 1963, it started a Scheme US-64 to assimilate small savings and provide benefits of Stock market to the investors. ULIP was launched in 1971 for the first time to give such benefits to the investors. This is scheme is having 2 Plans with duration of 10 Years and 15 Years and premium is payable on half yearly and yearly basis in Jan and July every year. The payment in the Plan is eligible for tax benefit under section 80C of the Income Tax Act, 1961.
When such scheme was launched, Life Insurance Corporation of India was carrying on life insurance business as a monopolist. There was neither Securities & Exchange Board of India (SEBI) nor Insurance Regulatory and Development Authority (IRDA). At that time, life insurance was undertaken as a means to provide financial coverage to life risk and to save income tax.
With the passage of time, size of the stock market grew substantially and SEBI was created by an Act of Parliament to regulate the stock market in India. With the globalization and liberalization insurance business started in private sector and with a view to regulate and develop insurance business in India IRDA was created.
In this development process, Insurance Companies came out with number of products to meet the needs of each investor. In such sequence of development, for the investment element of ULIP, number of options is made to invest in high risk securities or risk securities or secured securities or highly secured securities. Such investment is managed like a Mutual Fund.
The Insurance Companies made the investment in stock market and administrated it like Mutual Funds (MF). The investment in stock market is regulated by SEBI. The regulations required registration and approval of each scheme by SEBI. It was not obtained by the Insurance Companies for the various ULIP launched by them.
So far as, controversy between SEBI and IRDA is concerned, it can broadly be seen from two angle-legal and practical are investment big chunk of the premium in stock market as M.F. then as per the rules of MF issued by SEBI, such Scheme must be registered and approved by SEBI to carry on such business. The practical aspect is that as per the Rule of IRDA, Insurance Companies can change up to 40% of premium as Upfront Fees while as per the Rules of SEBI with effect, 01.08.08, nothing can be charged. Thus, to summarize, as per SEBI investment in stock market has to be regulated by SEBI and not the IRDA.
From investor’s point of view, they have not to worry at all. Government has already allowed seeking investment under ULIP even during the pendency of controversy, of course, if Upfront Fees would not be charged by the company, more amount will be available for investment for the benefit of the investors. On the whole, ULIP is a good scheme but very careful decision is required in selecting specific plan keeping in view the risk appetite of each individual.
This research goes into the background of the ULIP controversy and the reasons behind the executive and legislative move. It also analyse the Ordinance of 18th June 2010 and the Securities and Insurance Laws (Amendment and Validation) Act, 2010, and tries to answer, whether India requires a super-regulator.
THE UNIT LINKED INSURANCE PLAN (ULIP)
A Unit-Linked Insurance Plan (ULIP) is a type of life insurance where the cash value of a policy varies according to the current net asset value of the underlying investment assets. It allows protection and flexibility in investment, which are not present in other types of life insurance such as whole life policies. The premium paid is used to purchase units in investment assets chosen by the policyholder.
ULIP came into play in the 1960s and is popular in many countries in the world. As times progressed the plans were also successfully mapped along with life insurance need to retirement planning. In today’s times, ULIP provides solutions for insurance planning, financial needs, and many types of financial planning including children’s marriage planning.
In India investments in ULIP are covered under Section 80C of IT Act. However, the concept of having an investment and insurance by the same instrument was challenged by the market regulator SEBI which took up the matter to the Supreme Court of India .The Indian government brought down curtains on the two-month long tussle between the regulators by ruling that Unit-linked Insurance Products (ULIPs) will be governed by the Insurance Regulatory and Development Authority (IRDA).
THE ULIPs CONTROVERSY
On August 2009, IRDA abolished entry loads for mutual fund schemes. On December 2009, SEBI issued show-cause notices to some life insurers asking why action should not be taken against them for selling ULIPs without its approval. Again, on January 2010, SEBI questioned Insurers about not seeking SEBI’s permission over issuance of ULIPs.
On February 2010, IRDA made a statement that, “ULIPs are broadly similar to the mutual funds, except that they are required to segregate a certain part of the premium towards the life insurance of the plan holder.”
On March 2010, IRDA further stated that, ULIPs globally are managed by insurance regulators, and under no circumstance will we let ULIPs to be taken over by SEBI.”
On 9 April 2010, SEBI issued an order asserting its authority over the ULIP scheme and asking 14 life insurance companies not to collect money under ULIPs. Both existing and new policies were covered in the circular.
This was followed by the IRDA, on 10th April 2010, directing the insurance companies to disregard SEBI’s directive. IRDA had claimed in March, “ULIPs globally are managed by insurance regulators, and under no circumstance will we let ULIPs to be taken over by SEBI”.
On 12 April 2010, Finance Secretary Ashok Chawla said that it was an issue between the two regulators and they should resolve it among themselves.
Subsequently, the two regulators were asked by the Finance Ministry to refer the matter to court for a legal interpretation with the judgment being binding on them and to maintain status quo until the decision was given.
On 15 April 2010, SEBI moved the Supreme Court and some high courts (including high courts of Delhi, Bombay and Hyderabad) to guard against any ex parte decision.
The clarification given by SEBI while withdrawing the order asked these companies not to launch schemes without its prior approval.
18 June 2010 Ordinance: The ordinance of June 18 brought within the jurisdiction of IRDA the power to regulate ‘Life Insurance Business’ including hybrid insurance products like ULIPs. The ordinance had treated RBI at par with other regulators leading its Governor, D Subbarao, to express reservation saying this would dilute the authority of the central bank.
Securities and Insurance Laws (Amendment and Validation) Bill, 2010: The Lok Sabha approved the Bill to set up a panel to resolve regulatory disputes between SEBI, IRDA, RBI and PFRDA and replace the ordinance.
THE SECURITIES AND INSURANCE LAWS (AMENDMENT AND VALIDATION) ORDINANCE, 2010
The conflict between the two major regulators viz. SEBI and IRDA, over the hybrid instruments like ULIPs required an immediate solution. Since the Parliament was not in session tan Ordinance was passed by the President of India on 18th June 2010.
Chapter I of the Ordinance provides immediate effect to the Ordinance. Chapter II deals with an amendment to the Reserve Bank of India Act 1934. It inserts a new Chapter IIIE which establishes a joint mechanism to put to rest difference of opinion between the regulators with regard to regulatory jurisdiction over certain instruments. These instruments are listed as derivatives, money market instruments, repos or reverse repos or securities as defined in the Reserve Bank of India Act or policy of insurance as defined under the Insurance Act, or any other securities referred to under the Securities Contracts (Regulation) Act.
The joint mechanism will also have the power to decide matters relating to difference of opinion over whether a product is a “hybrid or composite instrument, having a component of money market investment or securities market instrument or a component of insurance” . As a result of the amendment to the Reserve Bank of India Act, 1934, a joint committee was constituted under Section 45Y (1).
Chapter IV of the Ordinance amended the Securities Contracts (Regulation) act, 1956. Under the provisions of this chapter, “securities” shall not include any unit linked insurance policy or scrips or any such instrument or unit, by whatever named called, which provides a combined benefit risk on the life of the persons and investment by such persons and issued by an insurer referred to in clause (9) of section 2 of the Insurance Act, 1938.
“Collective Investment Scheme” shall not include any unit-linked insurance policy or scrips or any such instrument. Notwithstanding anything contained in any judgment, decree or order of any court, tribunal or other authority, the provisions of section 2 of the Insurance Act, 1938 (4 of 1938) or section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), as amended by this Ordinance, shall have and shall be deemed to always have effect for all purposes as if the provisions of the said Acts, as amended by this Ordinance, had been in force at all material times and accordingly any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, issued or purported to have been issued at any time before the 9th day of April, 2010, shall be deemed and always deemed to have been validly issued and shall not be called in question in any court of law or other authority solely on the ground that it was issued without a certificate of registration under any law for the time being in force or without following any procedure under any law for the time being in force, by an insurer or any other person.
The Securities and Insurance Laws (Amendment and Validation) Act, 2010
This Act came into existence on 18th June 2010. It clarifies that ULIPs shall be regulated by IRDA and not SEBI. It also provides for a Joint Mechanism to resolve disputes between regulators over the right to regulate other such hybrid products. The Finance Minister is appointed as chairman of the joint commission and RBI governor as ex-officio vice-chairperson of the joint commission. While the former was provided for in the Ordinance, the latter has been included in the Act as a result of the concerns of the RBI governor being taken into account.
Act proposed that in case of any differences among the regulators, the reference shall be made to the joint commission only by the respective regulators and not by the government. The Act appoints the RBI governor as the ex-officio vice-chairperson of the Joint Committee, rather than as a member as put forward by the ordinance.
The controversy surrounding the question of jurisdiction over Unit Linked Insurance Plans (ULIPs) led to a series of events. The dispute over the nature of ULIPs and under whose jurisdiction they fall caused the Central Government to come to the decision that a super-regulator was required to oversee grey areas in the Indian financial system.
As a result an Ordinance was promulgated on the 18th June 2010, and subsequently the Securities and Insurance Laws (Amendment and Validation) Act, 2010, was introduced. The above said Act has been passed by the Lok Sabha. Now the question is, whether there should be one regulator or more than one which could possibly have jurisdiction over a particular instrument.
Multiplicity of regulators creates severe problems in inter-regulatory coordination. Experience around the world suggests that this problem is very difficult to solve even with strong structural mechanisms for coordination. In India, these coordination mechanisms are also quite weak. Coordination problems are aggravated by the variation in skills and experience across regulators.
It is one which seems to have been answered by the Central Government by this move. Hence it is concluded that the Ordinance, and the Act, are the right steps taken and they are in the right direction, as they aim to provide better coordination between the financial regulators, to solve the issues like that of ULIPs.