Dispute over ULIPs (for interview perspective)

Ulips are hybrid instruments serving dual need of insurance and investment. and where a part of the amount paid by sub-scribers is invested and a small portion goes towards insurance pre-mium. SEBI passed an order in April this year saying that regulation of Ulips should be its responsibility rather than IRDA’s, as the funds were mostly invested in stock markets. Sebi had justified it by saying that in some of the products 90% of the money was channelised into markets and not insurance. On April 9, it had banned 14 insurance companies from selling ULIPs without its approval, saying they needed to register with the market regulator. This was opposed by IRDA, which asked insurance compa-nies to ignore the directive. The finance ministry intervened and asked both sides to seek legal recourse to the problem. 

How was the dispute settled? 

The President promulgated an ordinance last month clarifying that life insurance business includes Ulips, which meant that IRDA would con-tinue to regulate Ulips. Four Acts -- RBI Act 1934, Insurance Act 1938, Sebi Act 1992 and Securities Contract Regulations Act 1956-- had to be amended for the purpose. The decision was taken just days before the Supreme Court was scheduled to hear the matter on July 8. 

What is the new controversy surrounding the joint committee envisaged by the ULIP ordinance? 

In a bid to ensure that similar disputes that may arise in the future are taken care of, the ordinance provided for a joint mechanism headed by the finance minister, two other government representatives and the four regulators, for settling conflicts over hybrid products. 

What are the RBI’s concerns? 

The RBI has said that it the central bank had certain reservations and concerns relating to the ordinance. Reportedly, the central bank feels that the dispute resolution mechanism worked out can undermine the autonomy of the regulators. It is more inclined towards the current mechanism for dispute resolution, --the non-statutory High Level Coordination Committee on Financial Markets chaired by the RBI governor. It is holding discussions with the finance ministry on the issue.

What is the way ahead? 

The government has to move a bill in Parliament in the monsoon session of parliament to get the ordinance, a temporarily law, passed into a law. The government can make changes when it moves the bill or allow the ordinance to lapse by not moving the bill altogether.

What were fallouts of the dispute? 

It prompted the IRDA to look within and reform ULIPs by issuing fresh guidelines. Ulips launched after September 1, 2010 will have lower charges, guaranteed returns, longer lock-in period and larger insurance cover.