Sunday, June 20, 2010

Goof up again or is it something else....

Govt. came up with an ordinance on the issue simmering between the IRDA and the SEBI over who of the two should be regulating the ULIPs (Unit Linked Insurance Plans). Here is the news. Govt. has decided to take the IRDA side. Now that's puzzling and curious - everything the ordinance, its logic and its timing.

First a background -
ULIPs are considered/treated as Insurance in India  however they are sold as investments. Meet an insurance seller and they would start telling you how the ULIP will multiply your money and save tax - no one is really interested in telling you that its an insurance first.

To Mutul Funds, which are pure investments and have nothing to do with Insurance ULIPs are a competition.

One does not need to be an expert to see that in India, Mutual Funds (MF) are a better regulated and hence more transparent industry than Insurance. A MF manager has to inform investors about the way money in a fund has been invested. Recent improvements in regulation has stripped MF mangers of the ability to charge entry loads and commisions for their agents to be charged to their customers. On the other hand we very rarely come to know of what is being done to our money invested in the ULIPs. It is a well known fact that the upfront charges that a ULIP customer ends up paying are plainly ridiculously high. Further ground reality is that the agent of the Insurance company often misleads the customer on these charges and their real impact on their investment.

Recently SEBI asserted that the ULIPs should also comply with the rules and norms of SEBI as it was basically an investment product and hence deserves to be regulated by SEBI. IRDA took strong obejections. The question is currently subjudice whether SEBI's interpretation holds.

I am not an expert in investing - but common sense tells me that - SEBI had a strong case. ULIPs are an investment option wrapped in the garb of insurance. In fact read this excellent piece by Dhirendra Kumar making a case for stripping ULIPs' returns of their tax free status as well.

The ordinance by the Govt. makes the legal case in the court irrelevant. What it has effectively done is that it has prevented the court to pronounce its stand on the question. Why the hurry? Why this ordinance just a few days before the court hearing on the matter was due. And why in favour of ULIPs?

Obviously there are political compulsions - a fairly large number of investors are invested in ULIPs, Quite large numbers of them are unsuspecting middle class retail investors in search of future security, lured by attractive looking returns. Most of these were confused in the ongoing debate wondering whether they made a mistake committing themselves to the ULIPs. This pronouncement would make them feel comfortable as they would again see others buying ULIPs as they did earlier. For Insurance companies it will be business as usual. This would not rock the boat - so to say for the Govt. An ordinance timed now obviously means that even Govt. senses the possibility that the court might accept the logic of SEBI's orders.

Now, don't get me wrong. I am not saying ULIPs are useless products - but they have been packaged to misguide. It has a upfront cost heavy structure which makes them strictly a very long term option. Mutual funds are a far better option for an investor. Further, the ULIPs (read insurance companies) are opaque in their operations.  And, all said and done, a normal investor can, with just a little bit research, invest in MF at substantially lesser cost and achieve almost the same, if not better, returns.
Strictly from policy making view - Govt. seems to have snubbed the better regulator. There is a strong case for investors to be encouraged to choose MFs over ULIPs (or bringing ULIPs closer to MFs in their operations & sales) and some help from regulators would have been a good idea. Govt. seems to have taken a technically administrative view that IRDA is for insurance and have ignored the basic premise in the issue - that of ULIPs not really being an insurance.
SEBI although lost this round but did great service to common investors. Now IRDA will have to be more watchful and proactive - as they will be watched by everyone with great interest. My take is that IRDA will be pushed into reforming Insurance industry to make it more transparent and responsible.
My problem however, is that is this just another case of incompetent goofup by the Govt. or there is more behind the scene games?