Regulation is the most coveted item in India’s administrative circles. The ULIPs case has once again reiterated that Indian regulators love to vie for greater regulatory scope and power. The unit linked insurance plan is a hybrid instrument which originated to circumvent the front loading restrictions in mutual fund industry. Today ULIPs share a significant chunk of the markets and their architecture is similar to that of a mutual fund unit with underlying securities. The popularity of ULIPs owes to the specific deductions allowed in the Income Tax Act under chapter 6 deductions.
Basically, ULIPs are units of a fund which provide life insurance cover to the subscribers by investing the subscribed sums in market securities (in specific equities). Hence, it acts as a mutual fund under the cover of an insurance fund. This arrangement can be further judged by considering the facts that only a small sum out the periodical premium is diverted to insurance cover while the larger chunk is directly invested in markets. Moreover, IRDA permits a plethora of front end loads for insurance products which makes these ULIPs, all the more interesting to agents and markets brokers.
Now, the question is who should regulate this hybrid instrument? The CBDT, revising its stance on Chapter 6 deductions for ULIPs for the proposed Direct Tax Code, has suggested that it would allow deductions for instruments strictly classified as insurance products by IRDA, hence indicating a regulatory exclusivity on ULIPs to IRDA. However, the genesis of this regulatory debate began when SEBI has slapped, all the companies issuing ULIPs, with a show cause notice alleging that transactions in ULIPs is an unapproved/ illegal business. This provoked the Ulippers to approach IRDA which in-turn counter notified that SEBI’s notification is ultravires of its regulatory powers. The government has intervened to mellow down this, almost melodramatic, regulatory war, and referred the regulatory issue to the Supreme Court.
However, in a sudden turn of events the Government of India has come out with an ordinance which delivered a clear victory to IRDA in this regulatory turf war. There has been no public discussion and no real assessment of the strengths and weaknesses of these regulators. Moreover, the very nature of the ULIPs instrument has not yet been strictly defined under any sphere. This ad hoc arrangement to protect select interests does not appear as a healthy reform signal from the Government.
