Why Sebi feels it just has to regulate Ulips

The Securities and Exchange Board of India’s (Sebi) move on unit-linked insurance products (Ulips) has surprised many in the market. But, industry players said the capital market regulator could not afford to keep the product outside its purview given its potential to influence equity markets in coming years.

In a circular issued last Friday, Sebi said issuance of any Ulip would require its permission, even though these are considered insurance products, under the purview of the Insurance Regulatory and Development Authority (Irda).

Ulips have become one of the most popular investment vehicles in the country due to distributor aversion to mutual fund products after the August 2009 ban on entry load. Till then, distributors earned hefty commissions on MF schemes.

MFs, regulated by Sebi, lost influence on equity markets as selling equity schemes without a wide distributor network became difficult. So, inflows into equity schemes fell significantly. Fund mobilisation by the MF industry then reached a nadir. In the past seven months, only 12 new funds were launched. These collected just over Rs 2,000 crore. According to data provided by the Association of Mutual Funds in India, in August 2009, only three equity schemes were launched, which collected Rs 82 crore. In September, five new schemes mopped up Rs 826 crore. No new schemes were launched in October and December last year.

“Sebi's move to bring Ulips under its ambit was an attempt to maintain its image as a powerful regulator of the equity market. Over the past few years, the influence of insurance companies over stock markets has grown with the rise of investments in Ulips. If the product, with a potential to pump huge long-term money into capital markets, is not under Sebi's purview, the regulator’s influence over equity markets diminishes automatically and Irda, which regulates insurance companies, will become more powerful,” said one of the top insurance and mutual fund distributors in the country, who did not want to be named.

During the first 11 months of the previous financial year, a total of 1.67 million Ulip policies were sold, the total premium collected being Rs.44,611 crore ($9.9 billion). The total premium involved in these products amounted to Rs 90,645 crore (a little over $20 billion). Experts believe this will double in the next couple of years. Nearly 95 per cent of the Ulip money is deployed in capital markets.

According to distributors, Ulips earn 15-20 per cent upfront commission on each scheme sold, while MF schemes yield a measly 0.5-1 per cent. So, distributors have started luring MF investors towards Ulips, resulting in good growth for insurance companies.

At a time when the MF industry's total assets under management are around Rs 7.5 lakh crore, insurance behemoth Life Insurance Corporation alone has the potential to pump over Rs 1 lakh crore into equity markets. And, collectively, insurance companies’ funds may well equal foreign fund flows into the country. Reason enough for Sebi to want to regulate these.