Tuesday, April 13, 2010

SEBI suspends its ULIPs order - BUT ONLY PARTLY!

See my immediately preceding post on SEBI's order prohibiting specified insurance companies essentially from (i) starting new ULIP schemes and raising monies thereon and (ii) accepting further monies from existing ULIP schemes (and of course from doing incidental acts like issuing offer documents, etc.).

Readers, I am sure, are too well aware of the heated debate thereafter. It was reported that on the intervention of the Finance Minister, SEBI agreed to withdraw its order and SEBI/IRDA were to solve the jurisdiction issue through reference to appropriate "forum". It was repeatedly reported that the whole order was to be withdrawn and thus, while monies could be continued to be accepted on existing ULIPs schemes, new ULIP schemes could also be started. Purely in terms of consistency, this was logical as one could not say ULIP schemes are illegal without SEBI registration and then allow existing schemes to continue.

SEBI has now issued a Press Release which contradicts these press reports of restoring FULL status quo ante.

Essentially, SEBI's Press Release states that existing ULIP Schemes will be allowed to continue and raise further monies (though see my reservation below). However, importantly, new schemes will NOT be allowed to set up without registration with SEBI.

The following are the words used:-

"This is to bring to the notice of investors that SEBI has decided to keep in abeyance, till further notice, the enforcement of the above directions with respect to the ULIP schemes /products existing on the date of the order, i.e. 09.04.10. However, with respect to any new ULIP schemes / products launched after 09.04.10, the directions mentioned in the said order will be enforced as indicated therein."

Note also the cryptic words used - "SEBI has decided to keep in abeyance, till further notice, the enforcement" of its Order for existing ULIP Schemes. Does this mean that, even for existing ULIP Schemes, SEBI has not "withdrawn" its Order and the Order is merely under "abeyance"? - "till further notice"? Does this mean that insurance companies can raise monies even on existing schemes at their own risk and find at a later date that, this Order, whose "enforcement" only was kept under "abeyance" is now "confirmed" and all their actions illegal?!

Or is it that I am reading the Order too technically and maybe the words used are just to get around the controversy as to whether SEBI has powers under law to revoke/modify its own Orders once it has issued them? (while on this, how can a "Press Release" modify the Order? Perhaps a formal Order will follow.).

In any event, viewed in one sense, the intention of all concerned may be to close this sordid chapter of ULIPs, take a practical approach and do not disturb what has already happened particularly since stopping existing schemes could result in market disruption.

But, viewing it from another angle, I am cynically reminded of the saying to the effect that "if you borrow $1000, the bank owns you, if you borrow $100 million, you own the bank"!

I also do not know whether SEBI's Order of suspending its Order only partly reflects the actual final "agreement" reportedly reached or it reflects its own decision in the matter. If it is the latter, this week will be as eventful as the last weekend!

- Jayant Thakur

2 comments:

Mandar Kagade said...

At the very outset, thank you Mr. Thakur for these two posts on the ULIP-ban issue.

Regarding the partial suspension of the SEBI order and its stance that there has to be no fresh sale of ULIPs, it seems to me that the recent uncertainty over the issue will have that effect regardless of the true remit of the SEBI order and the reputational sanction that has been indirectly been been brought to bear on this product will keep the consumers (or investors?) away from it freezing the market for ULIPS.

The most hassle-free way was for the fourteen aggrieved parties to move a higher forum -- either SAT or the High Court(227)/Supreme Court under Article 136 and for the IRDA to file an amicus in support of the petitioners. Thats how mature democracies and developed financial market regulators handle it. The recent F-cubed claim in the US sup. Ct. (National Australian Bank v. Morrison)is a case in point.

IRDA's diktat to its constituencies to disregard SEBI's formal order was non-est (as there was no legal ground for it to launch itself) thus and gave a (unnecessary) political slant to what was an easy legal recourse.

If India is to move away from the emerging market to an "emerged" market, rent-seeking public bureaucracies ought to be reined in. Indeed, I see in IRDA's intervention, Stigler's theory of regulatory capture @ work.

Thanks again.

Lawman said...

Hi Jayant,

You are spot on with your observations!

The original order of SEBI was under Section 12(1B) of the SEBI act. Being a quasi-judicial order it cannot be set aside. SEBI should ideally issue another order under the same section to set aside the earlier one.

I think the press release is merely clarificatory in nature. The tone of the press release suggests SEBI's reluctance to budge from its stand.

Kind Regards,
Lawman