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The Regulatory Mess

Omkar Goswami


Once upon a time, two kinds of non-banking bodies that handled our savings. There were the mutual funds, which put our money in various funds — some entirely equity based, some wholly debt, and others combinations of the two. The Unit Trust of India was the pioneer. You purchased ‘units’, whose value went up or down depending upon how the equity markets and interest rates behaved. Since India was often on the up, the net asset value (NAV) of the units went up. When that happened, the unit holders were happy — and often bought more units from what were often seemingly more attractive schemes.

The other instrument was life insurance, which had a longer provenance thanks to the Life Insurance Corporation of India (LIC). In my father’s days, long before capital markets became the rage, it was plain vanilla insurance. You bought a 10, 15, 20 or 25 year policy with a solid death or disability cover; paid your premium twice or four times a year, and got tax relief; the money was invested in government securities or public sector bonds; and you got paid at the end, or in two or three instalments.

The safe bores invested in insurance which gave poor returns but insured your life. The more adventurous got their kicks out of mutual funds. Some invested in both.

That changed in the last five years. The private sector life insurance companies found that they too could invest in shares, subject to actuarial advice. They added an insurance cover — occasionally substantial but often sparse — to create a magical instrument called ULIPs, or unit linked insurance products. Soon ULIPs became more attractive than units: the upsides gave capital gains, with insurance; while in downturns, you still got the insurance.

The mutual fund chaps freaked. Soon there was a turf war. The Securities and Exchange Board of India (SEBI) felt that ULIPs played in its regulatory domain. The Insurance Regulation and Development Authority (IRDA) believed that since all ULIPs carried insurance, these fell in its bailiwick. The hostilities got rough when the SEBI tried to restrain insurance companies from issuing ULIPs. The IRDA screamed blue murder, and who the hell are you to enter my turf. After a week of thunderous tantrums, the Finance Ministry stepped in.

Uncle Pranab was pissed off. He had enough hassles to deal with as the country’s MCT (Madam’s Chief Trouble-shooter). He hardly wanted Chandu Bhave and Hari Narain, fellows whom he scarcely knew, to scream at each other outside his window. So he fixed them, and the Reserve Bank of India (RBI) to boot. As the Finance Ministry smirked along.

He passed the Securities and Insurance Laws (Amendment and Validation) Ordinance, 2010. That set up the Financial Stability and Development Council (FSDC) — a joint committee headed by the Finance Minister, with the financial sector regulators (such as the RBI, the SEBI, the IRDA and the Pension Fund Regulatory and Development Authority) and Finance ministry officials as members to resolve disputes like the one he was saddled with. It effectively ended the earlier High Level Coordination Committee (HLCC) on financial and capital markets, which had the same regulators, but was chaired by the RBI Governor — the seemingly independent domain of the regulatory honchos with the RBI Governor as the rightful primus inter pares. With the ordinance, the tie-boys of Bombay and Hyderabad were history. The bush shirts of Delhi again came to the fore.

Small wonder, then, that the RBI has expressed its grave reservations. As has SEBI. So, too, I believe the IRDA. Though these two had better learn to stop having silly scraps in the public before being solemn in their dissent. The PFRDA doesn’t matter.

The tragedy is that the RBI has needlessly got shafted. It had nothing to do with this turf war; had handled its elder brother role quite well; and yet got bulldozed with the rest. As far as the SEBI and the IRDA go, I have no sympathies. If you scrap like pathetic kids in public, you run the risk of being whacked by Mummy or Papa. That’s what happened.

The tragedy is more profound. Independent regulators aren’t God’s gift to to human-kind. But they are usually way better than full-fledged bureaucrats. By behaving like two sets of immature morons, whose testosterone dominated their brains, the IRDA and the SEBI have created a beautiful stage for true-blue babu takeover.

Now they are complaining — the RBI with reason, the other two two because of their own stupidity. They want the ordinance to lapse. It should because babus mustn’t ever get back to that space. That needs wisdom and goodwill from Pranab Mukherjee. He may still display it. But no thanks to Messrs. Narain and Bhave.

Believe me, that’s the unalloyed truth.


Published: Business World, August 2010


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