MUMBAI versus HYDERABAD!

By Rama Krishna Vadlamudi

April 12, 2010 Bombay

A different kind of battle is being fought fiercely by the plucky Mumbai and the resilient
Hyderabad teams. The brawl is about who should control the Indian ‘Premium’ League
(IPL). Sorry guys! This is not about IPL – the Indian Premier League. The slugfest is
about the battle for ‘Premium’ that investors pay for their investment in Unit Linked
Insurance Plans being sold by life insurance companies. Well, the Mumbai-based SEBI
and the Hyderabad-based IRDA are fighting an unprecedented turf war in Indian
financial markets. This is about who should control ULIPs. ULIPs are basically savings
products with a sprinkle of insurance. While about 95 per cent of the ULIP premium will
be invested in equity markets, the remaining five per cent is set aside towards the life
cover of the insured, that is the ULIP policyholder.

Meanwhile, latest news being flashed by the media

is that the crisis about ULIPs has been resolved
temporarily after the intervention of the Government
through the Finance Minister, Pranab Mukherjee.
The Ministry of Finance has devised a formula for
resolving the tussle. As per the formula, SEBI and
FLASH NEWS! IRDA have agreed to decide the issue in an
appropriate court, whose judgment would be binding
on SEBI and IRDA.

The last word is yet to be said about the

controversy. We can expect lot of fireworks in the
next few quarters if not years in this regard.
 Rama Krishna Vadlamudi, BOMBAY April 12, 2010
www.scribd.com/vrk100 vrk_100@yahoo.co.in
MY BLOG: www.ramakrishnavadlamudi.blogspot.com

What is the background to the row?

The latest row had started when SEBI had banned 14 life insurance companies from
selling ULIPs a few days back. A day later, IRDA had directed insurance companies to
ignore SEBI’s order and continue to sell ULIPs as usual. This had created a lot of
confusion among millions of ULIP policyholders. The Government has stepped in finally
and with the Finance Ministry’s directives, the matter has come to a temporary halt – as
reported above – for the time being and status quo ante has been restored.

A lot of mis-selling of ULIPs has happened and it continues to happen even now. One
glaring example of the mis-selling is: these ULIP products have been sold (and are being
sold even now) to gullible villagers who do not understand these products nor do they
have any knowledge about stock markets.
SEBI argues that ULIPs come under the purview of Collective Investment Schemes – this
financial product is regulated by SEBI. SEBI’s contention has been that insurance
companies should take its permission before launching any ULIPs. As the structure of
ULIP is basically investment in equity markets, SEBI’s seems to be correct in its stance
of regulating ULIPs. SEBI’s is on a good legal wicket as far as regulation of ULIPs is
concerned. As the matter is going to be resolved in a court of law, it would be interesting
to watch the developments on this front.
We can see more such controversies in future as India is in an evolutionary stage with
regard to regulation of financial markets. A lot of overlap happens in regulation of
financial instruments and products. As we have seen in the case of Exchange-traded
Currency Futures (which were introduced in August 2008),
http://www.scribd.com/doc/21686968 two entities can regulate any financial product if
there is an overlap. Both SEBI and RBI regulate currency futures market in India. Even
in case of Exchange-traded Interest Rate Futures (which were introduced in August
2009), http://www.scribd.com/doc/19236501 both SEBI and RBI are the regulators. As
such, it would not be wrong to think that ULIPs can be regulated by both SEBI and
IRDA.

Are our laws inadequate?

Ajay Shah, a veteran expert on financial markets from NIPFP, argues that more products
may need to be brought under joint regulation. He argues that Government Securities,
which are traded on NDS platform daily, shall be brought under the control SEBI. SEBI
is the regulator for various other securities. He contends that a lot of groundwork needs to
be done in India to improve our existing laws. His article on regulation of ULIPs can be
read at: http://www.financialexpress.com/news/column-sebi-regulates-the-ulips/604764/0

We have one body called High-Level Coordination Committee on Financial Markets

(HLCCFM) with representatives from several regulators, RBI, SEBI, IRDA, etc. This
body is headed by RBI. This is supposed to resolve inter-regulatory issues.

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 Rama Krishna Vadlamudi, BOMBAY April 12, 2010
www.scribd.com/vrk100 vrk_100@yahoo.co.in
MY BLOG: www.ramakrishnavadlamudi.blogspot.com

New Initiatives by GOI

One initiative in the recent Union Budget 2010-11 is the proposal to set up a Fiscal
Stability and Development Council to sort out any issues between the regulators of
financial markets, like, RBI, IRDA, SEBI, PFRDA, etc. This will replace the existing
HLCCFM. Another Budget proposal is setting up of a Financial Sector Legislative
Reforms Commission (FSLRC) to overhaul over Indian laws pertaining to financial
markets, like RBI Act, Insurance Act, Public Debt Act and SCRA Act, which are very
old. Let us hope that these initiatives will bring more clarity on India’s financial sector
regulation in future.

Another important area that has been hanging fire for a long time is who should control
financial conglomerates – which operate in all areas of finance from insurance, banking
to mutual funds. RBI has been sitting on the framework for establishing holding
companies for Banking Group. ICICI Bank wanted to set up a holding company
encompassing all its businesses, from banking, insurance and mutual funds. ICICI Bank
wanted to monetize its insurance and AMC businesses. Its application with the RBI for
setting up a holding company has been pending for more than three years. Even, the
country’s biggest bank, State Bank of India too wants to set up a holding company. When
YV Reddy was governor of RBI, he argued that we require more laws to regulate such
holding companies as present laws in India were not adequate to deal with such giant
organizations. Since then, the proposal for holding companies has not found favour with
the authorities. Interestingly, giant conglomerates, like, Lehman Bros. and AIG in the US,
have either collapsed or failed miserably due to lack of proper regulation and effective
supervision. Previously, it was thought that these institutions were “too big to fail.”

RBI had on August 27, 2007 issued a discussion paper about Holding Companies in
Banking Group.(http://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/79485.pdf). But, RBI
had chosen not to act on this matter until an appropriate regulatory entity was put in
place. The Rakesh Mohan Report of the Committee on Financial Sector Assessment,
released in March 2009, has also dealt with this issue. But the Government of India is yet
to take any action on these recommendations.

WHAT SHOULD INVESTORS DO?

Even though IRDA has taken a number of initiatives to curb the practice of mis-selling
them, ULIPs are not suitable to many investors – simply put, they are bad products for
most of the investors. In India, most of the individual investors are risk-averse; but, they
have been sold these ULIPs. During the stock market crash of January 2008-March 2009,
millions of investors have lost around 60 to 75 per cent of their money on ULIPs. Of
course, had they continued their ULIP investments till now, they would have recovered
around 60 to 65 of their losses. Effectively, most of the ULIP investors before 2008
would have lost about 40 to 50 per cent of their money, including the opportunity cost.

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 Rama Krishna Vadlamudi, BOMBAY April 12, 2010
www.scribd.com/vrk100 vrk_100@yahoo.co.in
MY BLOG: www.ramakrishnavadlamudi.blogspot.com

Investors need not worry about the controversy between SEBI and IRDA. Things will
take their own course in India. If investors understand the ULIP products well, they can
continue to invest their money in ULIPs after assessing their asset allocation, risk appetite
and suitability of the financial products. My personal opinion is that ULIPs are bad
products despite some improvements in their structure in the last few quarters. It would
be better if we avoid them at all costs.
ABBREVIATIONS USED:

IRDA – Insurance Regulatory and Development Authority – India’s regulatory body controlling life and
general insurance companies

NDS – Negotiated Dealing System – an electronic platform for trading of Government Securities controlled
by RBI

NIPFP – National Institute of Public Finance and Policy

RBI – Reserve Bank of India – the regulatory body for banks and NBFCs in India

SEBI – Securities and Exchange Board of India – India’s regulatory body controlling capital markets in
India, including mutual funds.

Disclaimer: The views of the author are personal. Picture courtesy: Google

You can read some of my BEST documents at…

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http://www.scribd.com/doc/29050580

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http://www.scribd.com/doc/28660075

3. Income Tax Slabs 2010-11-Resident Indians, Salaried Class, HUF, Etc-VRK100-28022010

http://www.scribd.com/doc/27601595

4. Indian Budget 2010-11 - HIGHLIGHTS and ITS impact on Individuals and Companies-28022010

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5. GREECE DEBT CRISIS - A Greek Tragedy Amid Double-Dip Recession Fears-VRK100-16022010

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For more, www.scribd.com/vrk100

The author writes copiously, blogs extensively and invests in stocks for fun!

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