Ulip fiat aimed at saving selloffs

“The agent will go where the money is.” — Committee on Investor Protection and Awareness in a report released last year

The government is behaving like the insurance agent. It is going where the money is i.e. unit linked insurance plans (Ulips).
An ordinance promulgated by President Pratibha Patil late Friday evening amended the RBI Act 1934,

Insurance Act 1938, Sebi Act 1992 and Securities Contract
Regulations Act 1956, and clarified by way of an
explanation that life insurance business includes Ulips.

This means Insurance Regulatory and Development Authority (Irda) of India, the insurance regulator, will continue to regulate Ulips.

An ordinance is a law issued by the President when the Parliament is not in session. It has the same bearing as a law passed by the Parliament but has to be cleared by both the houses of Parliament within a period of six months.

“The ordinance is valid till the next session of Parliament, or six months, whichever is earlier,” Darius Khambata, additional solicitor general, told DNA . “A bill will replace the ordinance in monsoon session of Parliament,” a government official not willing to be named told NW18 on Saturday.

The Securities and Exchange Board of India (Sebi), the stockmarket regulator, in an order dated April 9, 2010, had said that Ulips should come under the aegis of Sebi because a minor portion of the premium paid goes towards actual insurance, and a major portion was being invested.

“The reason the government may have gone with an ordinance could be that Sebi had a stronger case in court given that almost 99% of the premium collected by Ulips is invested and only 1% goes towards insurance,” said the head of a financial services firm, not willing to be named.
 
Ulips are investment plans offered by insurance companies with a dash of insurance. A major part of the money collected by Ulips is invested in the stock market. 

But why has the government suddenly come up with an ordinance, given that the Supreme Court is scheduled to hear the matter on July 8?

Also, the finance minister had said in April, “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.”

The finance minister’s statement was clearly in favour of Sebi,given that Sebi had starting August 1, 2009 banned mutual funds from charging entry loads from investors which were used to pay a commission of around 2-2.5% of the amount being invested, to mutual fund agents.

On the other hand, the Insurance Act 1938 allows insurance companies to pay a commission of as high as 40% in the first year of a regular premium policy.    

This means for every Rs 100 paid as premium, up to Rs 40 can be paid as commission to the agent.

That’s precisely what the two regulators, Sebi and Irda, have been fighting over.

So what has changed now?

Let’s go over what’s gone before to understand the government’s compulsions.

In February this year, the government divested 5% of its stake in the National Thermal Power Corporation. This follow-on public offering (FPO) did not fly of the shelves and the Life Insurance Corporation (LIC) of India had to be brought in to rescue it. Data from the Bombay Stock Exchange website (www.bseindia.com) shows that LIC picked up nearly 70% of the 41 crore or so shares on offer.

It was the same with the FPO of National Mineral Development Corporation (NMDC) where the government was divesting around 8.8% stake. LIC of India picked up around 59% of around 33 crore shares on offer.

Moral of the story: When the government is in trouble in the stock market, it is LIC, which comes to the rescue. 

As data from the Irda website (www.irdaindia.org) suggests, in the financial year 2009-2010 (April 1, 2009 to March 31, 2010), Ulips raised Rs 1,15,314 crore in premium, or around 68% of the total premium collected by insurance companies. While an exact break-up is not available, estimates based on numbers from previous years suggest that 40-50% of this premium would have been collected by the LIC.

“LIC is the critical investor for many issues,” said Jagannadham Thunuguntla, equity head, SMC Capitals.

The point then is, if the government wants to push through all the initial public offerings (IPOs) and further public offerings that it has scheduled in the days to come, it needs to ensure that there is enough liquidity with LIC and other insurance companies. And that can only happen if Ulips are in good stead.

In the last financial year, equity mutual funds saw a net inflow of Rs 595 crore. Ulips, on the other hand, collected 194 times more money, or Rs 1,15,314 crore, during the same period. This shows how critical continued inflow into Ulips is for the government to ensure that all the IPOs and FPOs it has planned to reduce the fiscal deficit, sail through.

“Sebi has effectively killed the equity mutual fund by scrapping the entry load, which was used to pay commissions to agents. Given that, mutual funds are really not in a position to provide liquidity in the market. In fact, since August, 2009, when the no load regime came into play, equity mutual funds have seen an outflow of around Rs 6,700 crore,” said the head of equity of a leading private sector mutual fund. “Given this, and the fact that a huge number of PSU IPOs and FPOs are scheduled, I am not surprised to see, which way the government has leaned,” he added. 

Ulips were not selling well since the turf war between Sebi and Irda broke out. “The sales proceeds (of Ulips) were bad since April because of the confusing situation,” said the CEO of a leading private sector insurer, not willing to be named.

“After the Sebi-Irda standoff, the media went to town highlighting the exorbitant charges and commissions Ulips pay. So Ulips have acquired a bad name, prompting people to stay away,” said a certified financial planner, not willing to be named.

With the ordinance being issued, this is bound to change, and insurance companies can go ahead and launch new Ulips and continue to raise astounding amounts of money as they have in the past.

“There was some uncertainty about launching new products. But now we will launch new products,” said V Srinivasan, chief financial officer, Bharti Axa Life Insurance.

This should help the government ensure there is enough money in the market for its big-ticket IPO of Coal India Ltd, which is expected to raise Rs 15,000-17,000 crore. The government will also have to sell equity in companies like MMTC, NTPC, Hindustan Copper, SAIL, Power Grid Corporation, Power Finance Corporation, National Hydro Power Company, IOC and a host of other companies, to comply with the norm of the public owning at least 25% of the equity of a company for it to be listed.  

Hence, in order to ensure that all these IPOs and FPOs, which are expected to total more than Rs 50,000 crore over the course of the next one year, are subscribed, the government will have to ensure there is enough money in the market. The more money Ulips collect, the better.

Meanwhile Irda, the insurance regulator is expected to come with a fresh set of guidelines on Ulips. Newswire 18 reported that when contacted, an Irda official said the regulator was waiting for the finance ministry to officially announce the ordinance before coming out with fresh guidelines on the product.

Panel on hybrid products
The government has set up a high level committee under the chairmanship of the finance minister for sorting out all issues of jurisdiction regarding hybrid products. The committee members will include the finance secretary, secretary of the department of financial services and the chiefs of the four financial regulators, viz. the Reserve Bank of India, Irda, Sebi and the Pension Fund Regulatory and Development Authority.