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The compromise settlement brokered by the finance ministry over the supervision of unit-linked insurance plans (Ulips) appeared to crumble late on Tuesday evening with the insurance regulator rejecting a toned-down version of the original order from the Securities & Exchange Board of India, or Sebi.

Earlier in the evening, Sebi issued a new order modifying its earlier directive and allowing life insurers to continue selling existing Ulips. But the capital market regulator said no new unit-linked plan could be launched by the 14 insurers mentioned in its first order.

This, however, failed to impress the Insurance Regulatory & Development Authority (Irda). "We will continue to approve insurance products as these fall within the ambit of insurance regulation," said Irda member R Kannan. Sebi's first order, issued on Friday evening, had barred 14 insurance companies from selling Ulips till they registered with it. On Saturday, Irda directed the insurers to ignore the Sebi order, forcing the finance ministry to step in.

Different interpretations of the truce

But it seems the two regulators have distinctly different interpretations of the truce agreed to in North Block. Finance minister Pranab Mukherjee had said the warring regulators had agreed to approach an "appropriate court". "Till then, status quo ante would be maintained," Mr Mukherjee had said.

It has, however, become clear that there is no consensus between the regulators on the meaning of "status quo". While Sebi's modified order barred the 14 insurance companies from selling new Ulips, Mr Kannan said Irda does not have the regulatory power to make distinctions between insurance companies-the 14 named by Sebi and 9 others-while clearing products.

A senior Sebi official, who spoke on condition of anonymity, said the two sides had reached an understanding that no new Ulips would be launched, and the revised order was merely formalising this position. "This is the only legal way in which we could have done it. We can't set aside our order. So to ensure investors are not inconvenienced and in a spirit of co-operation, we decided that insurance firms can continue with the old Ulips while waiting for a binding legal opinion on regulatory jurisdiction of this product before allowing sales of new ULIPs," he said. "We are studying the order and we have appraised the finance ministry about our views," said Irda executive director A Giridhar. Sebi was about to issue notices to nine other insurance companies, including state-owned LIC, when the finance ministry stepped in.

Mr Mukherjee, the man who may have to resolve the latest flare-up, said on Tuesday that he had not seen the modified Sebi circular. A securities lawyer said Parliament may eventually have step in to clarify jurisdiction. "It seems to be a difference of view and interpretation of the statement from the finance minister. But this is definitely not the way the two regulators should behave. This difference will continue for a while until there is a legislative solution rather than an interpretative solution of what is already in place," Somasekhar Sundaresan, partner, J Sagar Associates, told ET NOW, this paper's business channel. Despite the dispute flaring up again, industry officials expressed relief that existing policies could be sold.

"It's a welcome relief for the existing policy holders and that their investment won't suffer. They can continue to hold their policies alive and avail all the benefits. The new order may only affect the new insurance players who do not have too many products. Sooner or later clarity will come by," said SB Mathur, chief executive, Life Insurance Council. In a related development, a unit-linked plan investor filed a public interest litigation in the Bombay High Court on Tuesday against the Sebi order. The investor has said the clash between the two regulators is causing anxiety to lakhs of policy holders. The lawsuit is likely to come up for hearing on April 15.

There is also some doubt about the implementation of the finance minister's directive asking the regulators to approach an appropriate court of law. Legal experts say the two regulators cannot jointly file a petition as no court will act as a mediator. Only an aggrieved party can approach the high courts or the Supreme Court.

In this case, those hurt by the order-insurance companies-can file a writ against the Sebi order in a high court, most likely the Delhi or Bombay High Court. Irda can be made a party on the same side of the petitioners. Alternatively, both the regulators could approach the high court against each other. "It is not a civil dispute, it involves the jurisdictions of two major regulators who are created by law enacted by Parliament," said a securities lawyer.

In a related development, finance minister Pranab Mukherjee called for a no-load model for all financial products. "I believe India could set global standards by following a no-load plus fee model for the entire financial sector to ensure a fair deal for all market participants. I hope all financial sector regulators would work towards this goal," Mr Mukherjee said in his address at a Sebi function on Monday. This would mean that irrespective of the outcome of the current dispute, insurers will have to reduce charges on their products.

The commission structure has been a major bone of contention between mutual funds and insurance companies. Since August last year, Sebi has barred mutual funds from charging investors the standard 2.5% entry load while buying units. Mutual funds were using this load to pay commission to distributors. Under the new rule, distributors have to negotiate their commission directly with the investor. In contrast, insurers are paying distributors as much as 60% of the premium amount as commission towards selling unit-linked plans.

Source: http://economictimes.indiatimes.com/