The President of India has recently promulgated the Securities and Insurance Laws (Validation and Amendment) Ordinance, 2010 (“Ordinance”) setting to rest the controversy surrounding the ULIPs. By means of the Ordinance, the Government has unequivocally supported the claim of the Insurance Regulatory and Development Authority (“IRDA”) to regulate ULIPs.
Through the Ordinance, following Explanation has been added in Section 2(11) of the Insurance Act, 1938
“Explanation.— For the removal of doubts, it is hereby declared that "life insurance business" shall include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a component of investment and a component of insurance issued by an insurer referred to in clause (9) of this section.”
As a consequence, all forms of unit-linked insurance policies that contain a component of insurance shall now be considered as part of the life insurance business.
In addition, the Securities Contracts (Regulation) Act, 1956 (“SCRA”) and the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) too have been amended to clarify that ULIPs shall not be construed as securities or collective investment schemes, including mutual funds. Following explanation has been inserted after Section 2(h)(id) of the SCRA:
‘Explanation.— For the removal of doubts, it is hereby declared that "securities" shall not include any unit linked insurance policy or scrips or any such instrument or unit, by whatever named called, which provides a combined benefit risk on the life of the persons and investment by such persons and issued by an insurer referred to in clause (9) of section 2 of the Insurance Act, 1938. (4 of 1938)’
Following explanation has been inserted after Section 12(1B) of the SEBI Act[1]:
"Explanation.- For the removal of doubts, it is hereby declared that, for the purposes of this section, a collective investment scheme or mutual fund shall not include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a component of investment besides the component of insurance issued by an insurer."
It may be recalled that SEBI had assumed jurisdiction over ULIPs issued by the insurance companies primarily on two grounds, namely,
a) the ULIP schemes are akin to mutual funds, and hence are securities under the SEBI Act and SCRA. Section 2(h)(id) of the SCRA defined securities to include ‘units or any other instrument issued to investors under any mutual fund scheme’; and
b) under Section 12(1B) of the SEBI Act, no person is allowed to sponsor, carry on or cause to be carried on any venture capital fund, collective investment scheme, including mutual fund, unless the person obtains a certificate of registration from the SEBI.
The addition of the Explanations to the above two provisions has clarified the position that ULIPs are not units of mutual funds and, hence, are not securities. Therefore, SEBI will no longer be entitled to regulate ULIPs. The respective insertions in the Insurance Act, SEBI Act and the SCRA have been made with effect from April 9, 2010. Under the Ordinance, the ULIPs issued prior to April 9, 2010 too have also been validated, as if the same have been issued under proper authorization.
In the Ordinance, the Government has also provided for a mechanism whereby any dispute as to the jurisdiction of the regulatory bodies, namely SEBI, IRDA, Reserve Bank of India (“RBI”) and the Pension Fund Regulatory and Development Authority (“PFRDA”) shall be referred to a Joint Committee consisting of the Finance Minister, Finance Secretary, Secretary (Financial Services) and the chiefs of SEBI, IRDA, RBI and the PFRDA. The determination of the Joint Committee shall be binding on the regulators concerned. The RBI Act, 1934 has been amended to incorporate the joint mechanism by inserting Chapter IIIE (Section 45Y).
[1] It may be noted that in the Ordinance there appears to be a typographical error in as much as the body of Section 5 of the Ordinance that amends SEBI Act states that the Explanation shall be inserted after sub-section (1B) of Section 2. There is no sub-section (1B) in Section 2. Our understanding that this is merely a typographical error is confirmed by the fact that the Heading of Section 5 clearly states that Section 12 of the SEBI Act is sought to be amended by Section 5 of the Ordinance. Also, Section 6 dealing with validation of past acts also refers to amended Section 12 of the SEBI Act.
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