OVERZEALOUS SEBI STEPPED ON IRDA'S FEET TO PROTECT INVESTORS

In The 21st-Century Civil Socity, one cannot barge into a neighbour's home to discipline an unruly kid, however troublesome he may be. But that is what the Securities and Exchange Board of India (Sebi) has just done. Regulators have the mandate to expand, refine, improve and make a specified industry sophisticated and safe, but that cannot be extended to disguised lobbying.

Sebi's ban on 14 insurance companies from selling the popular insurance-cum-investment product called the unit-linked insurance plans (Ulips) gives an impression that it is fighting the cause of mutual funds. Top officials at the market regulator may be feeling guilty of putting mutual funds at a disadvantage by abolishing entry load last August that the fund companies say has benefited insurers at its cost. But that cannot be the reason for a regulator to step on to another territory.

Mutual funds claim that distributors are not selling their investment plans since they are not paid for selling them, while they peddle the Ulips that have features similar to a mutual fund scheme, but also an insurance cover. Commissions for Ulips are as high as 45% of the first-year premium.

These are indisputable facts.

But the question on what triggered the Sebi act has not got a convincing answer yet. The order by Sebi's whole-time member Prashant Saran on April 9 sounds weak and undermines the authority of the Insurance Regulatory and Development Authority (Irda). 'Protect the interests of the investors', 'akin to mutual funds' and 'collective investment scheme' are the main themes Saran appears to have relied on to write the ban order.

Most individuals hardly know the difference between savings and investment. When asked, an average Indian ends up saying she 'invests in bank deposits', 'mutual funds' and 'insurance policies'.

Can it be interpreted that people choosing fixed deposits are investors and they need to be protected by the market regulator?

So is the case with insurance. It is mostly seen as an investment and people don't believe they would die and it is for the dependents' benefit. That is why endowment policies far outsell term ones. Funds from selling policies are mostly invested in government bonds, a market supervised by the Reserve Bank of India.

Does the central bank ask insurance companies to register schemes with it?

There are obvious overlaps when it comes to investor protection. But so long as the surveillance and follow-up actions of the industry by regulators is reasonable, investors will feel safe. Ulips are not identical to mutual fund schemes, but similar. In case of death of a Ulip policyholder, the dependent not only gets the value of the premium paid so far, but also an assured sum. In the case of mutual funds, it is only the value of investments.

Sebi, over the 18 years, has established a system where investors in stock market are not shortchanged by brokers, mutual funds and, to some extent, even some private wealth managers.

But what makes Sebi think that Irda would not be able to do the same for buyers of insurance policies? Does Sebi know something more than what has been made public on Ulips to take a dim view of Irda? Did an insurance company disturb the securities market? Is there a case of rigging or unlawful practices in the market by an insurance company?

If there is a specific event, it has every right to punish. So far, Sebi has not presented any evidence on these.

The argument that it has jurisdiction over the collective investment schemes, so Ulips have to be registered with it does not cut ice when looked at in the context under which these regulations were formed. There were companies in the 1990s that sold ponzi schemes that would entail ownership in unknown teak farms and non-existent orange orchards, that turned out to be lemon. They had little capital, expertise and were dime-adozen - a perfect mix for a disaster. It happened. Hundreds of crores of investor money was lost. Those were termed collective investment schemes and those cheats were branded vanishing companies. There was no one to monitor then and Sebi took to regulating collective investment schemes.

Can insurance companies be painted with the same brush?

The capital requirement, financial expertise and the regulations through the insurance Act give enough comfort to policy buyers, at least for now. The industry, though nascent, is also littered with globally-established names such as New York Life, Prudential, Allianz and Aviva. Of course there are AIGs too. But Sebi too faced the CRBs, MS Shoes' and Satyam Computer about which we are yet to hear what it found.

The effectiveness of various regulators may differ, but one cannot act on an assumption that the other may be inefficient. The possibility of Sebi ensuring that commissions on Ulips are also banned leading to better returns is the only carrot. But the Irda itself could do that. After all, it took 17 years for Sebi to realise that entry load on mutual funds is unfair.

Source: http://epaper.timesofindia.com/