13 April 2010

SEBI, IRDA and the Finance Ministry - why they must alter track

I have a piece today in the Economic Times Insurance sector scores self goal, on the Ulip controversy between IRDA and SEBI. This was written yesterday morning and I have outlined the legal issues and concluded:

The insurance regulator setting the order aside is an attempt to do what only the, Securities Appellate Tribunal, high court or the Supreme Court can do, and is patently illegal and contrary to basic rule of law principles . Perhaps realising this, the regulator came out with a second statement stating soberly that they will take legal recourse in the appropriate forum. What happens if the insurance industry breaches the order without a stay order? The only thing Sebi does on breach of its orders is file criminal prosecution — mainly because it has no other tool to enforce its power.

The issue has wrongly been seen as a turf war between regulators originating in egos. It is a legal issue, with origins in investor protection and could have been resolved, if the products at issue were properly regulated in the first place by close coordination, perhaps with the intervention of the FM.


Now that the issue has moved out of the domain of regulation, the genie of the quasi-judicial order cannot be put back in the bottle even by Sebi and must be litigated in courts for years. Though there is likely to be a stay on the Sebi order given the very large numbers involved, Sebi stands on a solid footing from a longer-term legal perspective.

This was written before the yesterday evening update, which according to news agencies states that the finance ministry called on both SEBI and IRDA to jointly go to court and resolve it, and effectively stay the order till it is decided. This is both right and wrong. Right because the ministry realises it has no power to change the order. Wrong because no court will entertain a mediation between two regulators (or any two persons). The Supreme Court has repeatedly stated that it will not (and the high courts too) cannot act as mediators. They will only decide a controversy where something is legally challenged by one party against another (in a writ in this case).

Latest update, stop press 6pm, 13 Apr 10: SEBI has passed an order keeping in abeyance its previous order only to the extent of old schemes of Ulips. It means, SEBI has not backed down and has only stayed that part of the order which is likely to cause disruption to old unit holders. All future isssuances must submit to SEBI for approval or face prosecution. (Media reports yesterday therefore were inaccurate, that there is status quo ante or things back to normal - which I have argued is not legally permissible).

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