Unit Linked Insurance Products (ULIP) and Regulatory Tangle

Abstract

Securities and Exchange Board of India (SEBI) and Insurance Regulatory and Development Authority (IRDA), two regulators in India have locked horns over Unit Linked Insurance Products (ULIP). This product which was regulated by IRDA hitherto was claimed by SEBI to be a collective investment scheme defined in SEBI Act, and SEBI banned 14 insurance companies from issuing fresh products in ULIP scheme without the insurance companies issuing these products obtaining a registration from SEBI for marketing collective investment products. IRDA on the other hand issued directive to the insurance companies to ignore SEBI directive. The wrangle got so murky that the Central Government had to intervene and ask both regulators to maintain status quo till a final binding legal decision comes from a competent legal forum. IRDA and the insurance companies have approached various courts and the matter is pending a final decision. This article examines the legal position with regard to ULIP products and the disputed regulatory claims in the light of various statutory provisions and settled judicial decisions. Subsequent to this article, President Pratibha Patil, by the Securities and Insurance Laws (Amendment and Validation) Ordinance 2010, amended the four laws to clarify that life insurance business shall include ULIPs or scrips or any such instruments. The ordinance inserted an explanation to section 2 of the Insurance Act 1938 declaring “life insurance business shall include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a component of investment and a component of insurance issued by an insurer . . .” In order to remove any ambiguity, the ordinance inserted an explanation to section 2 of the Securities Contract (Regulation) Act declaring “securities shall not include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a combined benefit risk on life of the persons and investment by such persons and issued by an insurer referred to in clause (9) of section 2 of the Insurance Act 1938″. In the SEBI Act, an explanation to section 12 has been inserted to the effect that collective investment scheme or mutual fund shall not include any ULIP or scrips or any such instrument or unit, by whatever name called, which provides a component of investment besides the component of insurance issued by an insurer. Nullifying the SEBI’s order of April 9, the ordinance categorically declared that the amendments made in the four acts “. . . shall have and shall be deemed to always have effect for all purposes as if the provisions of the said acts, as amended by this ordinance, had been in force at all material times...” In order to sort out the jurisdictional issues regarding hybrid products - like insurance and mutual fund - a high level committee under the chairmanship of finance minister has been constituted. The other members of the committee are the union finance secretary, secretary, the department of financial services and the chiefs of four financial regulators - RBI, IRDA, SEBI and the Pension Fund Regulatory Development Authority. Thus the observations in the article have been accepted by the Government of India.