“What do you expect me to do, will I remain a mute spectator, if they (regulators) quarrel like petulant children?" With this famous statement, former finance minister Pranab Mukherjee (now President) justified setting up Financial Stability and Development Council.
The Association of Mutual Funds in India or Amfi’s latest request to the government whereby it sought permission to manage insurance company’s funds brings back memories when the spat between the two regulators – the Securities and Exchange Board of India (Sebi) and the Insurance Regulatory Development Authority (Irda) – reached the courts and more importantly, led to this statement Mukherjee’s at the Rajya Sabha.
Let's walk down the memory lane.
April 11, 2010: Irda, under chairman J Hari Narayan issued a tough response. “The Irda is satisfied that the order of the Sebi… will bring the insurance industry to a standstill which would not be in public interest and would be detrimental to the interests of the policyholders and prejudicial to the interests of the insurers. Therefore, in exercise of the powers vested in the Authority under Section 34(1) (a) and (b) of the Insurance Act, 1938 , and after due consultation with the members of the Consultative Committee , all the 14 insurance companies which are mentioned in the order of Sebi are directed to note that notwithstanding the said Order of the Sebi, they shall continue to carry out insurance business as usual including offering , marketing and servicing Ulips in accordance with the Insurance Act, 1938, Rules, Regulations and Guidelines issued thereunder by the Irda.
After the two conflicting orders, the matter reached the finance ministry which asked the two watchdogs to jointly seek a legally binding mandate from the court. Following the government directive, Sebi allowed insurers to raise money from existing Ulips, but banned new launches under the scheme.
In June 2010, the President promulgated an ordinance amending the RBI Act 1934, Insurance Act 1938, SEBI Act 1992 and Securities Contract Regulations Act 1956, thereby clarifying by way of an explanation that life insurance business shall include any unit-linked insurance policy or scripts or any such instruments. Then, FSDC came into existence.
Given such acrimonious history, Amfi’s request seems a little strange. But one can understand its desperation. The mutual fund industry has been starved of long-term equity money. Industry players say that the average tenure of holding an equity mutual fund scheme is just two years. In comparison, since there is a lock-in period in unit-linked insurance schemes of five years, insurance companies are much better off.
So, fund managers in insurance companies are able to take long-term calls on their equities portfolio. As a chief investment officer of an insurance company said: “On a daily basis, I barely churn the portfolio.” The mutual fund CIO, on the other hand, is constantly under pressure. Since there is no lock-in, investors enter and exit whenever they see some profits or want to limit losses.
As the recent mutual fund data shows, in this recent rise, 400,000 equity fund investors have again exited the market in May. Mutual fund heads have to constantly be ready with cash because of the redemption pressure.
But insurance companies, especially Life Insurance Corporation of India and some others, have spent years and crores to create distributors across the country. Mutual fund houses are still struggling to collect money from smaller cities. And this inability to collect money has hurt them badly.
The worse part: In both the industries, private sector players have 20 years or less. But LIC, a public sector player, reached the grassroots and led the industry. Unfortunately, Unit Trust of India wasn’t able to perform the same role due to the complete breakdown of systems.
It’s true that the mutual industry needs some help from the government. But it should be in the form of retirement products or allowing higher limit under equity-linked savings schemes. Allowing it to manage insurers’ money would be a tad unfair. More importantly, the industry needs an aggressive leader especially when stock markets are doing well again. Game anyone?
The Association of Mutual Funds in India or Amfi’s latest request to the government whereby it sought permission to manage insurance company’s funds brings back memories when the spat between the two regulators – the Securities and Exchange Board of India (Sebi) and the Insurance Regulatory Development Authority (Irda) – reached the courts and more importantly, led to this statement Mukherjee’s at the Rajya Sabha.
Let's walk down the memory lane.
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April 10, 2010: Market regulator, Sebi under C B Bhave, banned 14 insurance companies from raising any money from public through unit-linked insurance plans. “I hereby direct the entities...not to issue any offer document, advertisement, brochure soliciting money from investors or raise money from investors by way of new 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 Sebi," Prashant Saran, wholetime Sebi member said in an order.
April 11, 2010: Irda, under chairman J Hari Narayan issued a tough response. “The Irda is satisfied that the order of the Sebi… will bring the insurance industry to a standstill which would not be in public interest and would be detrimental to the interests of the policyholders and prejudicial to the interests of the insurers. Therefore, in exercise of the powers vested in the Authority under Section 34(1) (a) and (b) of the Insurance Act, 1938 , and after due consultation with the members of the Consultative Committee , all the 14 insurance companies which are mentioned in the order of Sebi are directed to note that notwithstanding the said Order of the Sebi, they shall continue to carry out insurance business as usual including offering , marketing and servicing Ulips in accordance with the Insurance Act, 1938, Rules, Regulations and Guidelines issued thereunder by the Irda.
After the two conflicting orders, the matter reached the finance ministry which asked the two watchdogs to jointly seek a legally binding mandate from the court. Following the government directive, Sebi allowed insurers to raise money from existing Ulips, but banned new launches under the scheme.
In June 2010, the President promulgated an ordinance amending the RBI Act 1934, Insurance Act 1938, SEBI Act 1992 and Securities Contract Regulations Act 1956, thereby clarifying by way of an explanation that life insurance business shall include any unit-linked insurance policy or scripts or any such instruments. Then, FSDC came into existence.
Given such acrimonious history, Amfi’s request seems a little strange. But one can understand its desperation. The mutual fund industry has been starved of long-term equity money. Industry players say that the average tenure of holding an equity mutual fund scheme is just two years. In comparison, since there is a lock-in period in unit-linked insurance schemes of five years, insurance companies are much better off.
So, fund managers in insurance companies are able to take long-term calls on their equities portfolio. As a chief investment officer of an insurance company said: “On a daily basis, I barely churn the portfolio.” The mutual fund CIO, on the other hand, is constantly under pressure. Since there is no lock-in, investors enter and exit whenever they see some profits or want to limit losses.
As the recent mutual fund data shows, in this recent rise, 400,000 equity fund investors have again exited the market in May. Mutual fund heads have to constantly be ready with cash because of the redemption pressure.
But insurance companies, especially Life Insurance Corporation of India and some others, have spent years and crores to create distributors across the country. Mutual fund houses are still struggling to collect money from smaller cities. And this inability to collect money has hurt them badly.
The worse part: In both the industries, private sector players have 20 years or less. But LIC, a public sector player, reached the grassroots and led the industry. Unfortunately, Unit Trust of India wasn’t able to perform the same role due to the complete breakdown of systems.
It’s true that the mutual industry needs some help from the government. But it should be in the form of retirement products or allowing higher limit under equity-linked savings schemes. Allowing it to manage insurers’ money would be a tad unfair. More importantly, the industry needs an aggressive leader especially when stock markets are doing well again. Game anyone?