The SEBI-IRDA Fight

As a free market fundamentalist, it is embarrassing for me to admit that a regulator is doing a good job where the market has failed. However I am so pleased about how SEBI has taken on IRDA that I shall suppress my instincts and praise a regulator to the skies. Since this will mean unleashing my inner financial regulation geek, I shall do this in an easy question and answer format, so that even Nilu can understand what I am talking about.

Shortly before everyone’s attention was occupied by Shashi-Lalit-Sunanda and Sania-Shoaib, the SEBI had released an order barring insurers from issuing ULIPs. This got the insurers and the IRDA into a tizzy. Personally, I think this was awesome.

Wait, what does that even mean?

The SEBI (Security and Exchanges Board of India) is the semi-independent regulator of everything to do with financial markets in India. It sets the rules under which stock markets, commodity exchanges, and mutual funds operate. Technically, it regulates debt securities as well; but as Percy Mistry and Ajay Shah keep lamenting, India has no debt market to speak of.

A ULIP, or Unit Linked Insurance Product is a life insurance policy that doesn’t just give you life insurance cover but invests part of your premium payments into securities. It (claims to) therefore work as a savings and investment plan as well as a life insurance policy.

A ULIP is also pure evil. It is to consumer finance what the Chili’s Smokehouse Bacon Triple Cheese Big Mouth Burger with Jalapeno ranch dressing is to food. Actually, it’s worse, because the burger at least tastes decent. Compared to a normal life insurance policy, a ULIP gives you far less cover for the same premium – sometimes ten to twenty times less. As for the promise of investment, they deduct so much money for “administrative charges” that you might not even make the money you put in for six years at a time. There are other issues with ULIPs that make them terrible products, but that would make the post too long. If you’re interested, Deepak Shenoy has a post about how awful they are. Unfortunately, because the sales commissions on ULIPs are so high – that’s where the “administrative charges” go – insurance salespeople will keep trying to pitch you a ULIP unless you know what you’re looking for and actively demand traditional life insurance plans.

This year, the SEBI decided that enough was enough, and told insurance companies to stop coming up with new ULIPs unless SEBI approved them first.

It’s supposed to do that, right?

Ah, that’s the interesting bit. See, insurance companies are actually not regulated by SEBI, but by IRDA – the Insurance Regulatory and Development Authority. IRDA was very pissed off that SEBI is encroaching on its turf.

SEBI’s position was that since the investment portion of ULIP premiums is going into mutual funds run by the ULIPs, it needs to approve the mutual funds first. Specifically, it wanted to bring the administrative charges of ULIP funds into line with those that apply to regular mutual funds (it did a big overhaul of how mutual funds could deduct loads and charges last year).

So the situation was that two semi-independent regulators under the Ministry of Finance were fighting over who was in charge. Ajay Shah has a blogpost about how this is the outcome of not having overall financial regulators. I am far ruder than Ajay Shah, so I will make I-told-you-so noises about how this is what happens when the Finance Ministry doesn’t implement the Percy Mistry report – the one that, you know, it asked Percy Mistry to write.

What happened next?

There was a media circus about Sania Mirza and Shoaib Akhtar getting married.

No, no, I mean about the SEBI-IRDA smackdown.

Oh. Pranab Mukherjee told them to take it to the courts and get it sorted out over there. Professor Jayanth Varma was absolutely delighted about this, because past history shows that courts resolve disputes much faster than bureaucracy does. The BJP was much less delighted about this, and Arun Jaitley demanded to know why it was being taken to the courts and not being resolved by the Finance Minister himself. But now that they’ve got phone wiretaps to stall parliament over, we probably won’t hear anything about that again. It’s certainly disappeared from Google News search results.

Whatever happens next will happen in court now. But SEBI has a decent case.

Hee hee. You’re actually supporting a regulator.

Oddly enough, yes. Then again, I’m pretty gleeful about IRDA being pwned. So it evens out. I should also point out that IRDA represents a lot of what is wrong with regulation, both Indian and in general. It’s far more concerned about the welfare of insurance companies than insurance consumers, and about a month ago was actually running newspaper ads about the benefits of ULIPs. IRDA, not SEBI, should have cracked down on insurance companies about excessive charges and transparency.

On a less dogmatic and free market fundamentalist note, I like regulators who are heavily involved with creating the start conditions and rules of their market, and then creating a set of rules so good that the market can run by itself with minimal interference. I dislike the other extreme of regulation, where the regulator keeps getting involved with every little thing the market players do – think of a cricket match where the umpire doesn’t just call no balls and wides, but tells the bowler how to do the run up before every ball. Over the past few years, SEBI has been moving to the space where it only addresses the rules. The RBI and IRDA are still very much in the micromanaging space.

So I think this particular spat is very exciting in that it will provide an impetus to move to the regulatory model I like.

Confession: I bought a ULIP myself six years ago. In my defence, I was a filthy undergrad at the time and knew no better. I exited it this March. Fortunately stock prices are so high right now (unreasonably so, in my opinion) that I was able to get back all the money I’d put in and then some. My mum had also bought a ULIP a couple of years after me, and that still hadn’t broken even the last time we’d checked.

Some Public Transport Links

First up, the Times of India has a report on the Lajpat Nagar station of the Delhi Metro facing problems. While the station itself is being built, the Municipal Corporation of Delhi is refusing to give the Delhi Metro Railway Corporation land for entry and exit points. If this situation is not resolved, then come June 2010, the Metro trains will stop at Lajpat Nagar, but passengers will have no way to actually get into or out of the station.

In 2008 in Preview, I had written about the Bangalore airport being completed without a road to the actual city, and how passengers to Bangalore would have to take onward flights to Mangalore and then a Volvo to Bangalore from there. Now it looks like Metro passengers to Lajpat Nagar will have to go to Moolchand and take an auto from there.

Actually, metro stations that get built but where the trains that don’t stop exist/ existed in real life. Recently, there was Buangkok on the North-East line of the Singapore MRTS. The station was built, but not used for two years. Then, a chap had the bright idea of putting up cutouts of white elephants all over it. For his pains, he got hauled up by the police, shaken down and eventually let off with a stern warning. Singapore, eh?

The story doesn’t end there. The whole controversy meant that the station was finally opened to the public, and this was accompanied by a huge opening ceremony and party. Enterprising schoolgirls who were involved in social work decided to raise funds over there by selling ‘Save the White Elephant’ tshirts. They too were given a warning by the police:

On Friday, Jan 13, while preparations went into overdrive for the carnival to celebrate the opening of the $80-million station on Sunday, drama knocked on its doors yet again. This time, it was over some “Save the White Elephants” T-shirts that former Raffles Girls’ School (RGS) students were planning to sell at the carnival.

That day, the students and Punggol South organisers received a reminder from the police that they needed a fund-raising permit before they could sell the T-shirts to the public, in line with existing regulations. The 27 students were also told that they might break the law if the T-shirts were worn “en masse”.

Lawbreaking by t-shirt. Awesome.

Now, moving on to less bizarre matters, Governing magazine has a piece on proactive infrastructure planning (via). It makes the valid point that most transportation infrastructure planning is reactive, and consists of increasing capacity wherever there’s congestion. However, if you create capacity where none exists, the benefits to the places on that new route can lead to an economic boom there and change transportation patterns so that the old route gets decongested – everyone is going to the new places instead. The article uses the high-speed train line between Madrid and Sevilla as an example.

It’s an intuitively sensible concept, but the example given also made my inner skeptic sniff and ask the following questions:

  1. The Spanish economy has been having a general construction fueled boom for many years, right? So was the boom in Sevilla and Andalucia notably more than the rest of the country?
  2. What’s the boom in the region and city been? High-speed rail usually serves only commuters – and so the service industry. A manufacturing boom needs decongestion and faster speeds on cargo lines as well – did those get built or decongested too?

Also, the article doesn’t really give any pointers about which underserved route you should create your highway or rail line on. I mean, why Sevilla instead of say Granada or Valencia or Bilbao?

In fact (and this is where I come into disagreement with Atanu Dey), this is where small airports and low cost airlines score over high-speed rail – you don’t have to take expensive bets building an entire high-speed line only to find it doesn’t get utilised – just build a small airstrip and terminal, and let low cost carriers serve them. This was pretty much Captain Gopinath’s dream with Air Deccan, but unfortunately it didn’t work out for him personally. But he did use to make the point that the airstrips are already there – they just need to be served. And so the risk is entirely on the private parties who operate the routes – not on the government or taxpayers who have to build the rail lines.

Actually, making sure your new route is utilised isn’t as hit or miss as the last paragraph makes it sound. It’s been done successfully by the new ports in Gujewland – Pipavav, Mundra Adani, and Palanpur through private-public partnerships.

What has happened here is that the port operator has persuaded heavy industries to build new plants next to their ports and take advantage of dedicated terminals for iron ore or gas or finished products (don’t recall the details, sorry, and don’t have the paper this was described in on me right now). Then, the port operator, the industrial user of the port, and the Indian Railways set up a joint venture which is dedicated to linking the port to the existing railway network.

So merely building a route is not enough. You also need to ensure somehow that there are enough users for it. That is tangentially alluded to in the article when it talks about the Meteor line and the National Library in Paris, but never addressed explicitly. I know, the article probably had a word limit constraint, it only wanted to introduce the what instead of writing a thesis about the how, but I wish someone would address the how. Oh well.