In what promises to become one of the most significant actions ever undertaken by the regulator, SEBI has blocked 14 private insurance companies from promoting and selling ULIPs, as well as collecting fresh premium payments from existing ULIP customers. This action, affected through a detailed 11-page order issued by wholetime SEBI Member Prashant Saran last night, effectively blocks these insurance companies from selling or promoting ULIPs immediately.
The action follows notices issued by SEBI to all insurers in December and January. The order analyses in detail the replies given by insurance companies to those notices.
ULIPs are combined investments and insurance products that are a mainstay of the insurance companies. Generally, the investment part predominates and there is a tiny insurance part which has so far enabled insurance companies to circumvent securities laws. This point, that the insurance component is generally very small, is discussed in detail in the order.
The order applies to all existing ULIPs and future ULIPs. Some news reports, which have been widely quoted in other news media, have said that the fate of existing products is not clear. However, the order clearly applies to all existing ULIPs. Under this order, as of now, soliciting of money for fresh investments in ULIPs, promoting existing ULIPs in any way, as well as accepting fresh premium payments of existing ULIP accounts has clearly been blocked. The order is unambiguous on all these points. Here's the exact language in the order: "I hereby direct the entities mentioned in para 1 of this order 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 SEBI. This order is without prejudice to any action that might be taken by SEBI in respect of offer documents or advertisements issued by these entities for products (including ULIPs) having an investment component in the nature of mutual funds launched so far."
Value Research has always considered ULIPs to be a fraud that is being pulled on ordinary Indians and welcomes SEBI's move. There is no doubt that IRDA (Insurance Regulatory and Development Authority) and the insurance companies will fight hard to keep ULIPs the way they are. However, the logic explained in SEBI's order is sound, and there's little doubt that the investment component of ULIPs should be regulated like any other investment product.
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Jagadish Chandhar Somalinga:
The SEBI action against the ULIP is great news. I only hope the government takes a healthy view to protect the public from the ULIP fraud, instead of protecting insurance companies and the funds flow into the product.
Insurance agents sell ULIP with inadequate life cover to make it more attractive to the investors and themselves.
It will be a great day when the agents get 2% commission on the investment component of ULIP and normal commissions on the subscription to life cover.
What it shows up is what every citizen - and the Govt. of India - should be asking: did the insurance regulator do his job? Did he take steps to protect the larger interests of the consumer, or did he turn a blind eye to the activities of the very companies he was mandated to regulate? Considering that SEBI had written to these companies several months back to show cause why they were selling investment products without prior approval of SEBI, and these companies had brought the matter to the attention of the IRDA, the silence - or refusal to act - on the part of the IRDA needs a separate investigation in itself.
I am fully aware that the cash-rich insurance companies won't let the matter rest here. After all, this decision will have a crippling impact on their earnings. So, in the words of Winston Churchill, this is not the end of the battle. This is not even the beginning of the end. But it just might be the end of the beginning.