The tussle between market regulator Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development authority of India (IRDA) over regulating unit linked insurance products (ULIPs) has intensified with the Sebi banning 14 insurance companies from launching and advertising ULIPs and IRDA saying it will address the issue "expeditiously in the appropriate forum in accordance with the law".

Ulips, launched first in 2001, are sold aggressively by most insurers and have caught retail fancy. They are investment-cum-insurance products and today constitute almost 85 per cent of the first year business premium for the industry. These are heavily skewed on the investment front with only 5 per cent of the premium paid is used for providing the insurance cover.

Close on the heels of the Sebi move against Ulips, IRDA chairman J Hari Narayan said, "Policyholders of the ULIPs offered by different insurance companies are assured that these policies are safe and secure and the matters arising out of the recent orders of the Sebi will be addressed expeditiously in the appropriate forum in accordance with law." One of the options for the IRDA could be moving the courts against the Sebi move.

The finance ministry has decided to keep off this feud. "It's a matter between regulators; so they have to decide," finance secretary Ashok Chawla said. But Irda and Sebi could not resolve the issue between themselves, with the latter now finally initiating a legal process.

The market regulator says that the attributes of the investment component of ULIPs launched by insurance entities — which are regulated by IRDA — are akin to the characteristics of mutual funds which issue units to the investors and provide exit at net asset value of the underlying portfolio. The investment component of ULIPs is subject to investment risks associated with securities markets which are entirely borne by the investors, Sebi claimed.

In an order issued against 14 insurance companies late on Friday night, Sebi directed them not to issue any offer document, advertisement, brochure soliciting money from investors or raise money from investors by way of new and/or additional subscription for any product (including ULIPs) having an investment component in the nature of mutual funds, till they obtain the requisite certificate of registration from the Sebi.

Companies affected by the Sebi's order are: Aegon Religare Life Insurance, Aviva Life Insurance, Bajaj Allianz Life Insurance, Bharti AXA Life Insurance, Birla Sun Life Insurance, HDFC Standard Life Insurance, ICICI Prudential Life Insurance, ING Vyasa Life Insurance Company, Kotak Mahindra Old Mutual Life, Max New York Life, Metlife India Insurance, Reliance Life Insurance, SBI Life Insurance and TATA AIG Life Insurance.

"ULIPs offered by the insurance companies are a combination of investment and insurance and, therefore, the investment components are in the nature of mutual funds which can only be offered/launched after obtaining registration from Sebi under section 12(1B) of the SEBI Act. However, they have not obtained any certificate of registration from Sebi though the ULIPs launched by them had an investment component in the nature of mutual funds, as mandated by the SEBI Act," the Sebi order said.

Insurance companies had contended that their policies were launched after following appropriate procedures and obtaining requisite permission from IRDA, which is the regulator in case of life insurance products. "The approval/registration from one regulatory authority does not exempt the entity from complying with other applicable laws administered by relevant regulators," Sebi said.

Disputing the stand of the market regulator, insurance firms said that as units issued under ULIPs are not freely transferable or have transferability for limited purpose, they are not units of mutual funds. But Sebi said that not all the units of mutual funds are transferable. "In the case of open ended schemes of mutual fund the investor subscribes to and redeems from the mutual fund directly. The units of an open ended mutual fund scheme are, therefore, not transferable," Sebi said.

According to the submission made by insurance companies before the Sebi, unlike a mutual fund, a ULIP is not established in the form of a trust. "The fund is held by the insurance company itself as required under the Insurance Act. Ancillary features such as fund management, fund management charges etc, are alone not sufficient to convert a life insurance product into a mutual fund scheme. A ULIP is an insurance contract falling within the ambit of life insurance business," they said.

"Life Insurance business" is defined under Section 2(11) of the Insurance Act, 1938 inter alia to mean the 'business of effecting contracts of insurance upon human life' or 'the happening of any contingency dependent on human life'. "The said definition indicates that the policy is dependent on the happening or the non-happening of an event linked to human life," insurance companies argued. The product was launched after following appropriate procedures and obtaining unique identification number from IRDA, the firms claimed.

No plan to clip Sebi wings: Pranab

Kolkata: Union finance minister Pranab Mukherjee on Saturday said the government had no intention to reduce the power of the Securities & Exchange Board of India (Sebi) through formation of the proposed Financial Stability & Development Council (FSDC). Mukherjee had proposed the formation of FSDC in his Budget speech. FSDC is supposed to be an apex body among various regulators for speedy action in times of financial crisis. "We need more transparency in the capital market to reduce systemic risk while we need to encourage more financial products on exchanges for trading," he said. FE