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.

The Rich Are Not Like Each Other

There are three kinds of rich people in India. Lalas, yuppies and hippies. If you’re a rich person in India you pretty much fall into one of these three stereotypes unless you’re a rich hermit or something. By the way, this division is based on behaviour rather than actual net worth or occupation. So even poor or middle class people who feel rich and act that way fall into these categories. With that settled lets define them.

So lalas are basically the people who run family business or their family members. Their source of income is pretty much selling whatever the family business makes or doing real estate deals. To handle their finances they employ an accountant. To handle their homes they have domestic servants who are trained by the women of the house and who generally stay with the family in a lifetime employment situation. And the homes themselves have been in the family for years or purchased with a heavy black money component.

Then you have yuppies. These are basically the people whose income is salary from third party organisations and capital gains (though the capital gains are only for advanced yuppies). For housing they either pay rent or housing loan EMIs. They also do their household chores themselves or in the best case have a very unreliable kaamwali bai who they don’t have the time to train. The mark of a yuppie is that she or he does his or her own finances including personally paying the credit card bills, going over bank statements and marking their investment portfolio to market. And typically their job involves any one of the following either as input or output:

  1. MS office files
  2. code
  3. statistical models

So that leaves us with the hippies. The hippies are basically people who have neither family business nor salaried employment. They do stuff like fashion design or star in TV serials or movie direction or guided tours of Chandni Chowk or write books. This is stuff which doesn’t give a regular salary and which rarely involves Microsoft Office. The unsuccessful hippies are the ones who live with their lala families and whose day to day lives are handled by the lala family’s accountant and domestic servant. But the successful hippies like Arundhati Roy and Rakhi Sawant move out. Then they buy houses on EMI, employ a higher class of kaamwali bais, and have their personal finances looked after by private bankers.

Now of course there are boundary conditions. People who work in marketing and advertising draw salaries but basically have hippie occupations. So they are borderline hippie-yuppies. Then there are borderline lala-yuppies who handle new divisions of the family business. And all yuppies dream of being hippies and spending their days playing in a rock band instead of working the 9 to 7 grind. So these are not mutually exclusive categories but have some overlap and you can make a Venn Diagram of lala-yuppie-hippie.

But why am I talking about all this? Well mostly because I started watching TV back in July. That inspired me to come up with a blogpost, but before I can write that blogpost, I have to write this one with all the definitions. The main blogpost will come up soon. Till then, pip pip.