SEBI’s move banning ULIPs may trigger a legal battle and postpone IPO insurance plans  

April 10, 2010

The move of the Securities and Exchange Board of India (SEBI) to unexpectedly ban 14 major private insurance companies, including SBI Life, ICICI Prudential and Tata AIG, from selling Unit-linked Insurance Plans (ULIPs), will open up legal battles, level the playing field between mutual funds and insurance companies somewhat, slow down the scorching growth of insurance companies and stymie the plans of several insurance companies to go public.

“We are examining all legal options. The matter is certain to end up in the court,” said the head of a large insurance company, reacting to the SEBI move. Curiously, while banning 14 insurance companies, SEBI has left out Life Insurance Corporation of India (LIC), by far India’s largest insurer. LIC is owned by the government and has been used by the government to push through large disinvestments of public sector companies for which public and institutional appetite was lacking.

While passing an order banning ULIPs late on Friday night, SEBI said the entities have not obtained any registration from the regulator though the ULIPs were in the nature of collective investment schemes like mutual funds.

"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," said Prashant Saran, wholetime SEBI member in an order.

The insurance companies against whom SEBI passed an order are Aegon Religare Life, Aviva Life, Bajaj Allianz, Bharti AXA, Birla Sunlife, HDFC Standard Life, ING Vysya Life, Kotak Mahindra Old Mutual Life, Max New York Life, Metlife India and Reliance Life, apart from SBI Life, ICICI Prudetial and Tata AIG. The SEBI order will put a brake on the scorching growth of ULIPs, which combine investment with insurance. A few months back, SEBI had sent letters to several life companies asking them why they were selling investment products without its approval. Companies had responded that insurance laws permit them to offer investment product with a life insurance policy. In its final order SEBI said, “I find that the entities by their own admission have stated that there are two components of ULIPs— an insurance component where the risk on the life insurance portion vests with the insurer and the investment component where the risk lies with the investor. This establishes conclusively that UlLIPs are a combination product and the investment component need to be registered with and regulated by SEBI”.

ULIPs have been a hot-selling product. The total first-year premium underwritten by the life insurance industry has grown 15% between February 2009 to January 2010. Almost 80%-90% of this comes from ULIPs. Only a small part of this actually ensures insurance cover, inviting charges of mis-selling.

SEBI’s move will halt the plans of life insurance promoters who have sunk in over Rs26,000 crore in capital and would like to extract some of this through public issues. Insurance companies will have to land up in the doorstep of SEBI to have their prospectuses cleared. Even before that they have to win a legal battle of ULIP that now seems inevitable. — Debashis Basu