The ULIPs SEBI/IRDA tussle takes new turns practically every week and would not warrant further posts to my last one, (which was also followed by another post by a learned contributor) till either the Court decides the issue or the law is amended. However, I stumbled across a recent decision of the Delhi High Court (Chanchal Jain vs. SEBI (95 SCL 31 (2009)) dated July 24, 2009) on a related matter that is worth a quick mention here for several reasons.
Firstly, it apparently goes back to what is said to be the root of the current controversy and that is the ban on entry load/commission payment by mutual funds. Secondly, it also, albeit indirectly, considers mutual funds schemes vis-à-vis insurance policies and the fact that insurance policies command a higher commission. Finally, though not specifically on ULIPs, it is perhaps the only other recent decision (as far as I know) that deals to some extent directly with the current controversy.
Curiously, as will be seen later, on one hand the initial statements of the Court specifically state that SEBI has no power over life insurance policies and thus on first impression may appear to go against the recent SEBI Order on ULIPs. On the other hand, the reasoning given for distinguishing insurance policies and mutual fund units actually support the SEBI decision.
I have focused here on just one point of this decision but readers may find it generally worth reading the decision for other points.
Readers may recollect SEBI had issued a circular on June 30, 2009 whereby entry load on mutual fund schemes was banned and certain further disclosure requirements made. A writ petition was filed against this circular before the Delhi High Court.
While various contentions were raised, one relevant point made was that Article 14 of the Constitution was infringed since the petitioners have been discriminated. It was submitted that, “LIC agents are entitled to commission, which can go upto 40 per cent”.
The Court rejected this submission and it is interesting to read the reasoning of the Court:-
“The said contention has no merit. Life Insurance policies serve a different purpose and object. Life Insurance policies form a separate class and cannot be clubbed with mutual funds. SEBI does not control and regulate life insurance policies. It is well known that rate of return in an LIC policy is substantially lower. The primary object of a life insurance policy is to secure and benefit beneficiaries on death of the insured. The rate of return in mutual funds is market driven. It is not possible to accept the contention of the petitioner that insurance policies and their agents and mutual funds, agents and distributors form the same class and must have same rules of trade and charges. Article 14 does not prevent classification but ensures that there is no discrimination by treating two equals differently. Role of a distributor of a mutual fund is distinct and separate from the role of a life insurance agent.”. (emphasis supplied)
To reiterate, the first part makes it clear that SEBI has no jurisdiction over life insurance policies. However, the Court quickly followed this by briefly explaining what is a life insurance policy and how it is different from mutual funds.
Unfortunately, the peculiar concept of ULIPs which, as SEBI has shown with calculations, are often 98% mutual fund units, was not placed before the Court. Thus, while one cannot apply this decision directly to ULIPs, this decision should provide one more piece in the unraveling of the complex legal jigsaw concerning ULIPs and the powers of the two regulators.
– Jayant Thakur, CA.