SEBI v. IRDA: Exploring the tussle between regulators over ULIPs

The issue which we cover in this post is an interesting one. Two regulators have taken contrary stands and the issue of Unit Linked Insurance Plans (ULIPs) has in fact brought the Securities and Exchange Board of India (SEBI), the securities market regulator of India and the Insurance Regulatory and Development Authority (IRDA) at logger-heads in much as their respective jurisdiction and exercise of powers of concerned. Since legal issues are involved, we seek leave to bring to the attention of our readers the stakes involved and the potential fallouts of this tussle. 

First the facts: A whole-time member of SEBI, exercising powers under Section 11, 11B  and 12(1B) of the SEBI Act, 1992 has issued an order restraining fourteen (14) insurance companies from issuing "any offer document, advertisement, brochure soliciting money from investors or raise money from investors by way of new and/or additional subscription for any product (including ULIPs) having an investment component in the nature of mutual funds, till they obtain the requisite certificate of registration from SEBI." This order has been passed as in the considered view of SEBI the ULIPs launched by these companies were "found to be akin to the mutual fund schemes and were launched without obtaining registration" from SEBI whereas one of the functions SEBI as a market-regular is required to perform in terms of the SEBI Act is the "registering and regulating the working of collective investment schemes including mutual funds" towards which regard the "Securities and Exchange Board of India (Mutual Funds) Regulations, 1996" and "Securities and Exchange Board of India (Collective Investment Scheme) Regulations, 1999" have been framed in terms of which inter alia "“no person can sponsor or cause to be sponsored a collective investment scheme including a mutual fund unless he has been registered with SEBI under the SEBI Act." Thus according to SEBI these companies were in violation of the SEBI Act and regulations by launching and continuing with the ULIPs without being registered with SEBI and following its Regulations.

So what is the rub? Aren't all companies dealing with securities and mutual funds in India registered with SEBI and following its Regulations? Why are the insurance companies so special that they are not required to follow these Regulations? And most importantly, what brings IRDA in picture?

The answer to these questions lies in another Parliamentary enactment and the role of another market-regulators. The Insurance Regulatory and Development Act, 1999, which has constituted the office of IRDA and prescribes (vide Section 14) the powers, functions and duties of IRDA lays down that the IRDA "shall have the duty to regulate, promote and ensure orderly growth of the insurance business and re-insurance business" and in fact various other specific functions and duties have been prescribed by IRDA in this regard under the Act of 1999. Thus, in as much as IRDA is concerned, the sole dominion over insurance companies vests in IRDA and thus comes the rub when SEBI exercises jurisdiction over the insurance companies. 

IRDA has come on record to state that it had specifically "intimated to SEBI that the ULIPs are insurance products marketed by the companies licensed by the IRDA and each of the ULIPs and the conditions thereto are specifically cleared by the IRDA having regard to the Insurance Act and the Regulations issued thereunder and that consequently, the action of SEBI is wholly misconceived and without jurisdiction." Further, the IRDA is also concerned that if the order of SEBI is given effect to, it shall "cause the stoppage of all renewals of insurance policies already invested by the insuring public, may result in the forced premature surrender of insurance policies causing substantial loss to the policyholder and to the insurers.  The effective stoppage of the sale of the said products will cause a complete drying up of the revenue flows to the insurance companies which could disrupt the payment of benefits on maturity, on death and on other admissible claims, putting the policyholder and the general public to irreparable financial loss.  The financial position of the insurers will be seriously jeopardized thus destabilizing the market and upsetting financial stability."

Thus the IRDA has directed, exercising powers under the IRDA Act has directed all the 14 insurance companies which are mentioned in the order of SEBI "to note that notwithstanding the said Order of the SEBI, they shall continue to carry out insurance business as usual including offering, marketing and servicing ULIPs in accordance with the Insurance Act, 1938, Rules, Regulations and Guidelines issued thereunder by the IRDA" which the market calls as IRDA having overruled SEBI and this is where it props up interesting legal issues.

Issues Summarized: Before we deal with the possible legal outcomes, we thought it wiser to cull out the legal issues which are involved in these orders of the two regulators so as to have a clear understanding of the issues.

(1) What are those 14 insurance companies, in the line of fire, required to do? To follow the SEBI order and stop business or to follow IRDA order and continue business in ULIPs?

(2) What is the recourse available to either SEBI or IRDA if the insurance companies defy either of their orders? Will legal sanctions follow the insurance companies in case of their failure to meet out either of the orders?

(3) What happens to investors in these ULIPs? What is the legal status of the policies purchased/renewed by them after the SEBI order?

Examining the legal position: Here we examine the legal position on all of the three issues independently. However, even before we begin, we would like to put a caveat that in all fairness to both SEBI and IRDA, we will not comment upon the correctness of the orders passed by them. That is a issue which is required to be resolved through Good Offices or whatever legal means the regulators or the stake-holders may desire to choose. Here we are examining only the implications and fall outs over the contradictory stands adopted by the two regulators.

(1) and (2) A quick look at the SEBI Act will tell us that the power of SEBI are indeed very wide. The statement of objects and reasons of the Act tells us that SEBI has been instituted being envisioned as "a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith", a mandate which has actually be restated in Section 11(1) of the Act, thus making it an obligatory duty requiring SEBI to ensure that the interests of the investors are protected. Thus, generally, the SEBI does have power to require the entities dealing in securities and ensure that they meeting out the specifications listed in the Regulations prescribed by SEBI. These aspects have been upheld time and again even by the highest courts of the country. Therefore it is clear that the SEBI, in the preliminary, has the power to examine as to whether the role of entities doing business in India fits within the regulatory set-up administered by it. This logically points to the fact that SEBI, given the wide powers it is conferred with, can take action against defaulters for failing to meet its Regulations, which seems to have been done through the order passed by the Whole-Time member of SEBI.

Further, it is a well settled rule of common law that an order, no matter how perverse and illegal and one even without jurisdiction is binding over the subject unless set-aside in a manner known to law. In the present case, even assuming that the SEBI order is incorrect or as the IRDA puts it, without jurisdiction to begin with. However, given the legal set-up in which the rule of law operates in India, the fourteen insurance companies cannot sit over the order grossly violating its terms without getting it set aside. In the present case the only remedy available to them is to file an appeal against the order before the Securities Appellate Tribunal (SAT) or even a direct petition of special leave before the Supreme Court (under Article 136 of the Constitution) or a writ petition before the High Court challenge the order on grounds of lack of jurisdiction, illegality or otherwise. 

In the event the Insurance Companies violate the order of SEBI, the logical fallouts would be that SEBI will be constrained to take action (being a creature of statute, it is required and bound to follow the mandate of the Act and bring to book the defaulters of its orders) and pass necessary orders against these companies for having failed to carry out its order and continuing business. As far as the IRDA goes, it may have the jurisdiction to regulate and monitor insurance companies. However it does not have the powers to poke its nose and sit over judgment over the orders passed by SEBI. All it can do is represent the insurance companies before appropriate forum and carry their grievances further. It neither has the power nor the authority to over-rule a decision passed by a quasi-judicial authority in exercise of powers conferred by a Parliamentary statute. 

However, in as much as the IRDA has already passed orders directing these companies to continue doing business and in terms of the IRDA Act such powers are indeed vested in the IRDA, this brings the insurance companies in a catch 22 position. They are required by the SEBI order to desist from their business whereas the IRDA order directs them to continue doing the business as usual. So what if these companies decide to follow SEBI order and ignore the one passed by IRDA? Given the IRDA Act, they can be taken action against by IRDA, in which scenario they would be required to approach the appropriate forum to challenge such orders of IRDA. Either way, they are bound to face regulatory action from either SEBI or IRDA, depending upon which order they decide to follow.

Thus, as a matter of advice to these companies, the only optimal solution would seek that they approach the appropriate legal forum against the SEBI order and ventilate their grievances against it to get it diluted or set-aside. In which case, till the time the appeal/petition against the SEBI order is pending, the matter being sub-judice, IRDA would oblige by not taking any action against these companies. However, glossing over the SEBI order without challenging its legality can only cost the company in multitudes given the rule of law in the country that an order becomes final and binding if not appealed against or set-aside by an appropriate forum.

(3) Now let us deal with what the investors in these securities have in the offering. Let us assume that for the time-being the order of SEBI is here to stay (for the procedure for setting it aside will bring the appeal/petition in due course). In this scenario, the companies are legally barred from renewing or offering any ULIPs. Thus the new/renewed scrips are contrary to law (being the order passed in terms of the SEBI Act). The law of contracts entitles the agreements not enforceable by law as 'void'. Thus the ULIPs, which are nothing but agreements between the subscribers and the insurance companies, are void till the time the SEBI order stay. In this scenario, a subscriber cannot bring an action for violation of any of the terms of the ULIP by the company and vice versa. In fact the object of the such agreements, under the law of contracts, is also unlawful as it is forbidden by law and thus no legal rights flow from ULIP. 

This basically means that the subscribers will not be able to ventilate their grievances, for non-performance of its obligation by the insurance company under the ULIP before a court of law. A rule of equity might come to help the subscriber, but then it also another rule that law does not help those who knowingly enter into illegal agreements. Thus even the investors are here for a spin. To that extent one has to admit that the SEBI order is incomplete as it does not state the status of the ULIPs already subscribed to by the investors. It stops by saying that the order passed is "without prejudice to any action that might be taken by SEBI in respect of offer documents or advertisements issued by these entities for products (including ULIPs) having an investment component in the nature of mutual funds launched so far." Thus the status of the existing ULIPs depends upon further orders of SEBI and as to which side the camel will sit is anyone's guess. 

Post-script

The companies which are the subject-matter of the SEBI order are as follows;

a. Aegon Religare Life Insurance Company Limited
b. Aviva Life Insurance Company India Limited
c. Bajaj Allianz Life Insurance Company Limited
d. Bharti AXA Life Insurance Company Limited
e. Birla Sun Life Insurance Company Limited
f. HDFC Standard Life Insurance Company Limited
g. ICICI Prudential Life Insurance Company Limited
h. ING Vyasa Life Insurance Company Limited
i. Kotak Mahindra Old Mutual Life Insurance Limited
j. Max New York Life Insurance Co. Limited
k. Metlife India Insurance Company Limited
l. Reliance Life Insurance Company Limited
m. SBI Life Insurance Company Limited
n. TATA AIG Life Insurance Company Limited 

Latest Update

For further update on the Ordinance to resolve the tussle and our views on the same, have a look at the latest post.