The regulators proxy battle continues

The tussle between the two regulators which we discussed in this column in March is now turning into a full blown legal battle. This is not just a turf war – rather it is about protecting the interests of financial consumers.

On 9 April the Securities and Exchange Board of India (SEBI) banned 14 insurance companies from issuing unit-linked insurance plans (ULIPs). The reason given was the investment component of ULIPs (which in most cases is much more than 50% of its value) is subject to risks associated with securities markets. These risks are entirely borne by the investor and therefore, SEBI should regulate the investment component (not the insurance component).

SEBI has rejected arguments made by insurance companies that the structure of mutual funds is different to ULIPs. It said that the structure of the entity is immaterial for compliance with section 12(1B) of the SEBI Act, 1992. The “trust” structure is therefore not a condition that needs to be met to comply with this section, though it is a requirement for registration as a mutual fund. SEBI’s primary contention is that the substance and spirit of the SEBI Act and regulations framed under it emphasize investor protection which holds regardless of the nature or structure of the product.

Prachi Loona and Bharat Budholia are associates at Juris Corp, a Mumbai-based firm that specializes in banking and finance, foreign investments, private equity, direct tax, bankruptcy and restructuring, M&A, insurance, energy and infrastructure, dispute resolution and International arbitration.