Sucheta Dalal :Orchestrated Move
Sucheta Dalal

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Orchestrated Move  

April 21, 2010

When the deliberately created crisis between IRDA and SEBI leads to a panic, will vested interests find the perfect excuse to activate the Financial Stability and Development Council?

There is something more than meets the eye in the bizarre drama that is being played out between the insurance and capital market regulators. Before we go into details, let’s make it very clear that the murky construction of unit-linked insurance plans (ULIPs) and their rampant mis-selling needs to be corrected and it was outrageous that mutual funds and ULIPs did not operate on a level playing field for nearly a decade because the finance ministry did not rein in the money-mopping machine that the insurance industry had become. Of course, we don’t think SEBI is seriously trying to level the playing field either. Consider these facts.

Way back in the late 1980s, when the Securities and Exchange Board of India (SEBI) did not even have statutory powers, Dr SA Dave, its then chairman, laid down a process of consultation with stakeholders and producing discussion papers on issues. When SEBI got its statutory teeth, the process was formalised through a Primary and Secondary Market Advisory Committee and others.

CB Bhave, the present incumbent, went a step further and set up a Mutual Fund Advisory Committee. Ironically enough, it is headed by Dr Dave. But that was clearly a cosmetic move. There were no white papers and the Committee was not consulted on scrapping entry-loads in August 2009. Consequently, SEBI failed to realise that mutual funds would become even more disadvantaged and Rs7,500 crore would fly to ULIPs in the next few months.

SEBI then pushed the idea of selling mutual fund units through stockbrokers (off their screens). But this experiment also failed to take off. It then decided to target insurance companies—again without consulting the Committee and, worse, without even the pretence of uniform, industry-wide action that was properly explained to the investing public. SEBI first chose to wade into another regulator’s turf by issuing show-cause notices to its regulated entities. Having done that, it kept Life Insurance Corporation of India (LIC), the single biggest player in the Indian capital market with probably the biggest collection of money through ULIPs, out of the purview of its actions, along with some bit players.

While the insurance industry does need reform, it is stunning that many self-proclaimed pundits have been lauding SEBI’s tactics. A capital market system can work only if there is clarity about regulation, transparency in action and uniform application of rules. For one regulator to indulge in bullying, by transgressing on another’s terrain, is unheard of, especially when Parliament has approved a system of independent financial regulators with clearly delineated jurisdictions.

What is worse, SEBI didn’t, for a minute, consider that its sledgehammer blow on 9th April (a Friday evening), asking 14 insurance companies not to raise fresh money, would trigger panic among innocent investors. In fact, its initial order barred the 14 insurers from even collecting premium payments on existing policies, an explosive situation that was contained because the Insurance Regulatory and Development Authority (IRDA) told the insurance companies to ignore SEBI’s ban and conduct business as usual. This was followed by more drama at the finance ministry.

Finance minister (FM) Pranab Mukerjee’s actions on 12th April were almost surreal. The second most powerful minister in the Cabinet made a single-sentence statement that suggests that he, poor thing, is powerless to rein in SEBI. While on the one hand, he said, ‘status quo ante’ would be restored, he also told the two regulators to seek judicial help to resolve their differences. Barely had the media declared that IRDA had won the first round, when SEBI announced that, irrespective of Pranab babu restoring ‘status quo ante’, the 14 insurers cannot introduce fresh schemes without registering with SEBI.

IRDA has not yet asked them to ignore this ban too; if it does, there would be even more theatrics.{break}

Consider what could happen. Were one of the insurers to launch a new scheme and raise fresh money, SEBI can do nothing to stop it. But, given the autocratic manner in which it is behaving, this would be akin to waving a red rag before a bull. So the only retaliation possible would be to ask the stock exchanges (which it regulates) and brokers to bar trades from that particular scheme or maybe even the fund. Is it this realisation that has stopped IRDA from hitting back on 14th April? The picture will soon be clear.

What worries us, however, is the finance ministry’s haplessness. Both, IRDA and SEBI, report to the finance ministry. What stopped the FM from putting both regulators in a conference room at North Block and telling them that they could only leave when they had resolved their differences? Why would the all-powerful FM advise two regulators to go to court?

We believe that the government has no interest in a level-playing field. It doesn’t care about mis-selling of ULIPs or how investors are fleeced. So long as insurers collect loads of money and LIC is kept outside SEBI’s ban, it does not want to interfere—but the courts may force its hand. The slow judicial process will ensure that there is no decision for a couple of years, or maybe until after the next general elections. Meanwhile, LIC will continue to bail out the government’s, so-called, disinvestment programme; fund its chosen infrastructure projects; and even bail out private realty and motor-car companies whenever ordered to do so.

Where does all this leave the hapless investor? Well, for someone who has already invested in ULIPs, it is going to be a time for regret and confusion. These investors now have it on the authority of the capital market regulator that they have been sold a big lemon which will continue to suck their capital for several years (especially if they sensibly decide to stick to their investments for a decade) while giving them measly returns. All others, including insurance company heads, who have argued and railed at us for saying ULIPs were bad products, will probably hold their fire until the issue is sorted out. But the million-dollar question is: Will we really move to a zero-load regime in insurance?

Look at the facts and take your guess. If the finance ministry supports any such hasty action, it will put over a million active insurance agents out of business. It will stop money from flowing to insurance companies, without necessarily diverting all of it to mutual funds; in all probability, investment will move into bank fixed deposits. However, if this happens, insurance companies, which provided the biggest counter-balance to foreign institutional investors (FIIs) and hedge funds, will be weakened. At the same time, it will reduce the availability of long-term funds for supporting infrastructure projects when there is already a paucity of such funds.

When this deliberately created crisis triggers the expected panic, vested interests in the finance ministry will make haste to put in place the Financial Stability and Development Council which was announced during the Union Budget in February but has made no headway because of resistance from regulators. If the country and the investors pay a price for these machinations by certain bureaucrats, that is how the cookie has always crumbled in India. We will continue to watch the situation even as this column goes to print. — Sucheta Dalal

-- Sucheta Dalal