ULIP Ordinance: The legal dimensions analysed

We had promised our readers in our last update that we would be penning our thoughts on the legal dimensions of the ULIP ordinance as soon as we got our hands on it. Now that we have with us the legal text of the Securities and Insurance Laws (Amendment and Validation) Ordinance, 2010 promulgated by the President of India, furthering the quest of analyzing the legal perspectives as we always do on this blog, we carry forward that task on the the Ordinance No. 3 of 2010. In as much as on this blog we had analysed extensive the origin and the issued involved in the tussle between SEBI and IRDA on ULIPS in our earlier post we would desist from undertaking the exercise again except as and when required when we specifically cover that in this post.  

Ordinances understood

First and foremost, for the benefit of our readers, 'what is an Ordinance'. Legally speaking, in terms of Article 79 of the Constitution, the Parliament comprises of not just the two Houses (i.e. the Council of States or the Rajya Sabha and the House of People or the Lok Sabha) but also the President of India. These three institutions are the legislative organ of the Union. Thus the responsibilities of legislating for the country lies with these three collectively. Ordinarily it is the two houses which take up this task in as much as bills are presented before them, discussed/debate, voted and approved and upon the assent of the President, these bills become enactments or the law. However this does not imply that the President is devoid of such legislative powers. 

In order to deal with contingencies which arises in the event when the Houses of Parliament are not in session and the situation requires for a Parliamentary law, the Constitution confers power on the President to act on his own volition where in terms of Article 123 of the Constitution the President can promulgate an Ordinance. The Constitutional provision stipulates that "if at any time, except when both Houses of Parliament are in session, the President is satisfied that circumstances exist which render it necessary for him to take immediate action, he may promulgate such Ordinances as the circumstances may appear to him to require". Thus the absolute prerogative vests with the President in this regard. There are, however, two notes points to be covered in this regard.

First, the President performs a different role when issuing an ordinance than in the capacity of giving assent to this bill. While the satisfaction of the President to give assent to the bills presented to him after due passage by the Parliament is the personal satisfaction of the President, the role is different in regard to promulgation of Ordinance. The President while issuing an Ordinance is bound by the advice of the Cabinet led by the Prime Minister in this regard. We have already examined the law in regard to the President being bound by the advice of the Council of Ministers in our earlier post and therefore will abstain from speaking more on this.

Second, the power of promulgation of Ordinance, as held by the Supreme Court, while is an extraordinary power vested with the President, nonetheless is not beyond the purview of judicial review and the Constitutional Bench of the Supreme Court in A.K. Roy v. Union of India [AIR 1982 SC 710] declares that the judiciary can scrutinize the validity of the Ordinance issuing process. 

Having noted this, it is also important to remember that the life of an Ordinance can at the maximum be six weeks after the Parliament is in session. Therefore the Ordinance must be followed by a bill and enacted into an Act within six weeks of the re-sitting of the Parliament after the issuance of the Ordinance. If the Government fails to ensure the same, the Ordinance lapses. With this background now let us examine in greater detail the impact of the recent Ordinance.

Understanding the Ordinance dated 18.06.2010

A whole-time member of SEBI had issued an Order on 9th April, 2010 concluding that Unit-Linked-Insurance-Products (ULIPs) "offered by the said entities are a combination of investment and insurance and, therefore, the investment components are in the nature of mutual funds which can only be offered/launched after obtaining registration from SEBI". For this reason, and the companies having issued ULIPs without registration with SEBI, directed those companies "not to issue 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". The order was made in terms of the SEBI Act, 1992 whereunder the SEBI Member was of the view that he had the jurisdiction to decide so despite the objections of IRDA to this regard. This is the very first issue sought to be addressed by the Ordinance. 

This issue, however is not a simple one. First the respective powers and jurisdictions of the various market regulators involved required to be defined and that too in a manner that their jurisdiction is defined exclusive to each other, otherwise the issue of the same subject-matter being sought to be regulated by the two or more regulators would arise again. In this regard the Ordinance seems to have introduced a new feature namely the "Joint Mechanism" wherein under the issues relating to the jurisdiction between the regulators, being not just SEBI and IRDA but also including RBI, PFRDA, such issues are (instead of each regulator taking action in exercise of its powers) to be raised and reconciled by the Joint Committee which shall comprise of the Minister of Finance, Government of India and Secretary to his Ministry besides the Chairman of the respective regulatory bodies. Thus the jurisdictional issues shall now be addressed at an administrative level rather than through the exercise of quasi-judicial powers. 

In this context it is crucial to note that the Ordinance provides that "the decision of the Joint Committee shall be binding on the Reserve Bank of India, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority and the Pension Fund Regulatory and Development Authority". Thus the decision of an administrative body has been given statutory force. In as much as this provision is being inserted into an existing law (namely the RBI Act) and also that it has been clothed in a non-obstante clause, it shall override any other contrary provision under any other law, it would now not be open to the regulators to go ahead and act contrary to the Ministry's instructions. Thus its not just for SEBI or IRDA but the Government has gone ahead to ensure that no such jurisdictional tussles do not take place in full public view in future.

The second and more immediate change made in the Ordinance is the extension of the jurisdiction of IRDA as contrary to what was sought to be argued by SEBI as falling within its own ambit. Even earlier there was no doubt that the jurisdiction in respect of 'life insurance' products was exclusive to IRDA. Now the definition of 'life insurance products' has been extended to  "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" while simultaneously excluding them from within the definition of 'securities' such that SEBI shall not be able to bring them within its fold. 

On another interesting note, the Ordinance has been backdated i.e. even though it has received the Presidential assent on 18th June, 2010, retrospective effect has been given to the Ordinance from 9th April, 2010 which significantly is the same date on which the SEBI passed the critical order. Further, in order to wriggle out the insurance companies from the order of SEBI, the validation provision in Section 6 of the Ordinance overcomes the SEBI order by declaring that the "any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, issued or purported to have been issued at any time before the 9th day of April, 2010, shall be deemed and always deemed to have been validly issued and shall not be called in question in any court of law or other authority solely on the ground that it was issued without a certificate of registration under any law for the time being in force or without following any procedure under any law for the time being in force, by an insurer or any other person". 

Having understood the Ordinance, let us now examine the validity of the Ordinance.

Examining the validity of the Ordinance

Having had a look at the Ordinance, one must say that it is indeed an almost flawless piece of legislation in as much as it leaves little scope for challenge. By amending the provisions of the law under which the respective regulators have been established and by clothing the Joint Committee as a statutory body, its institution can hardly be challenged as being contrary to the statutory provisions of other laws or seeking to undermine the laws in force in India. By the amendment carried out by this Ordinance, the Joint Committee and the Joint Mechanism have come on equal footing as any of the regulators and given the provision of its decision being binding on all regulators, the decision of the Joint Committee are legally binding on all regulators. Its decisions would undoubtedly still be within the purview of judicial review (in terms of the constitutional powers vested in the High Courts and the Supreme Court) but then the grounds of challenge being very limited therein, the Joint Mechanism feature seems to be an efficient and legally sustainable mechanism for resolution of jurisdictional issues between the regulators. 

As far as the need for issuance of Ordinance is concerned, the scope of judicial review is already very limited. Nonetheless given the fact that crores of rupees of the innocent investors was at stake, the market was behaving erratically given the contradictory orders being passed by two regulators and the fact that each day of business loss is not only costing the insurance companies in the lime-lights but also the investors and more importantly the Government's business, one can only call the decision behind issuance of Ordinance as prudent such that an appropriate law can be enacted by the Parliament thus giving permanence to the provisions sought to be introduced by the Parliament. 

An effective restraint on the power of the President to issue the Ordinance is that the subject-matter on which the Ordinance has been passed must be one on which the Parliament can make laws. This takes us to the Schedule VII of the Constitution which delineates the power between the Parliament and State Legislatures. A bare perusal of the three lists in the said Schedule would quickly reveal that the Parliament indeed has the power to make laws on the issue in as much as legislative subjects such as 'banking', 'insurance', 'stock exchanges and futures markets', 'reserve bank of India' vest with the Parliament, which in any case is entrusted with the legislative function in respect of all residuary subjects as well. 

As far as the backdating of the Ordinance is concerned, it is well settled in the Indian jurisprudence that if a legislative body has the power to make law, it has the power to make law with retrospective effect. Thus if the Ordinance is successfully defended as being within the realm of the powers vested in the Parliament and thus exercisable by the President, the challenge to the Ordinance only on the ground of backdating would not be able to further the cause of the challenge. 

In as much as legislative overruling of the SEBI order is concerned, the law in regard to the validity of 'validation statutes' states that if the law-makers change the very basis on which the decision had been rendered, then the overruling of the judicial dictum and subsequent validation of the new law is permissible. Through such means the law-makers can not only validate an action contrary to an order of a quasi-judicial body but also overturn the decision of the Supreme Court and the Indian constitutional jurisprudence is replete with such instances. Thus the only aspect to be examined is whether the very basis on which the SEBI passed the order in eroded away or not. The answer to this is clear. 

The whole-time member of SEBI took into account the provisions of the SEBI Act, Securities Contract Regulation Act and the IRDA Act, all three of which stand amended to the effect that ULIPs and other similar insurance products are not covered within the definition of 'securities' but are instead a part and parcel of 'life insurance' products, then deleting the very basis on which the SEBI order was passed. Further the aspect of having given retrospective operation to the Ordinance implies that legally it would be presumed that the amended provisions as introduced by the Ordinance were in place at all times and thus the very basis (i.e. the statutory provisions) which were examined by the SEBI to find giving jurisdiction to SEBI over ULIPs never existed and thus the SEBI order is now without legal basis looking elsewhere for its sustainence. 

As far as the propriety of the Governmental action in issuing the Ordinance, considering the matter was sub-judice and that the Government had already filed its affidavit before the Supreme Court, again that is a ground on which we as commentators are not in a position to reflect but it is the Court itself which can take a view on the propriety. Technically speaking, sub-judice or not, the power to legislative cannot be curbed for any reason. Such incidents are again frequent in Indian legal diaspora and very rarely such instances have been called into question on such ground of propriety. Further, in as much as the courts are equipped to take judicial notice of facts subsequent to the origin of the litigation, the Supreme Court may well decline to exercise its jurisdiction of going into the merits of the matter in the wake of the Ordinance for it is equally well settled that the Courts in India do not decide over matters which have been rendered academic.

We may also leave it to our readers and lawyers who make like to take up this matter that it may well be a case that the amendment called into question may be challenged on the ground that the definition of 'life insurance' products, as amended by the Ordinance, does not quiet fit well with the introduction of ULIPs into the definition. However how and with what effectiveness such a ground may be sustained is for experts in Insurance to bring out the incompatibility and press thereon.  

However, in as much as the effect of SEBI order is in question, the law to this regard is well settled. We already wrote about it earlier and would be pleased to reiterate that any order, howsoever illegal, incorrect or without jurisdiction would be alive and kicking unless set aside in a matter known to law. Thus it would require a pronouncement from a competent court setting aside the SEBI order and unless such happens, the order would be legally binding. It is a different matter, however, that given the factual aspect relating to the introduction of the Ordinance and the legal aspect of the changes brought therein, very less remains to be said and done in compliance with the said order except wait for a formal pronouncement to that effect, in the wake of the Ordinance. 

We are slightly disappointed in which the issue has been given a burial in as much as we had been expecting fire-works in the Supreme Court when this matter was being argued. But better have a simpler solution rather than prolong the agony of the innocent investors. We will, as usual, in any case keep our readers posted of the subsequent developments. It would also be worthwhile to note that how quickly Parliament adopts the Ordinance for one may recall that it is only six weeks that the Ordinance has got to be approved for fade away into oblivion.