Opinion Tiptoe through the ULIPs

Collective investment schemes,or CISes,were introduced as a distinct category of investment products under the Sebi Act in 2000. Sebi was expected to regulate CISes,in addition to the mutual funds (which it was already regulating). Several categories of investment products — NBFCs,chit funds,and insurance contracts — that are regulated under independent regulatory regimes were excluded from the definition of a CIS. “Contributions to mutual funds” were also excluded,probably because they were already being regulated by Sebi under mutual fund regulations. Very clearly CISes were meant to cover whatever was not already part of the ambit of mutual fund regulations.

Both under Sebi’s regulations and in common usage,mutual funds have a distinct meaning and structure. The structure— consisting of a trust,trustee(s),an asset management company and a sponsor—is inherent to the understanding of what constitutes a mutual fund. Any investment vehicle does not become a mutual fund merely because of the similarity in products offered; there are other regimes (envisaged under the Sebi Act itself) that take care of such products. A logical conclusion should be that the prohibition under the Sebi Act on operating mutual funds without Sebi’s license should apply only where a mutual fund structure is being followed. All other categories of CIS are expected to be regulated as such by Sebi or other regulators,as the case may be,and not as mutual funds.

An expansive interpretation of the term “mutual funds” along the lines suggested by Sebi will make the exceptions from CIS redundant. Sebi can claim all such categories as mutual funds — which is clear from its stand that structure is immaterial if there is an investment component. But the categories excluded from CIS have been excluded to maintain the sanctity of the enactments under which they are regulated,and the independence of their regulators. This intent of the legislature needs to be respected. It is a settled position of statutory interpretation that every provision in a statute should be given some meaning,which in here can be done only if the exceptions are given their true meaning and are not appropriated under the category of mutual funds.

ULIPs are neither distributed,nor managed by mutual funds registered with Sebi. Even investors are aware of this distinction with mutual funds. They do,however,fall under the category of life insurance contracts under the Insurance Act,which recognises “contracts whereby payment of money is assured on death (except death by accident only),or the happening of any contingency depending on human life”,as life insurance contracts.

In several common law jurisdictions,investments have been recognised as an integral part of insurance,as long as there is an element of insurance. In Fuji Finance Inc. v. Aetna Life Insurance Co in 1996,the UK’s court of appeal held “capital investment bonds” to be contracts of insurance as the contract offered both death benefits and surrender benefits,though both benefits were same. “Capital investment bonds” were products identical to ULIPs.

Some common law courts have even rejected the test of primary or dominant purpose on the ground that any such determination will depend on the emphasis that the parties to the contract,i.e. the insurer and the insured,placed on the policy. In life insurance,most often both insurer and the insured know that the policy is also an investment product.

The judgments reflect the realities of the insurance industry. Sebi needs to take that into account. Pure life insurance products form an insignificant component of the insurance business — too insignificant to require a distinct regulator. Requiring ULIPs to be regulated by Sebi is a retrogade step that is legally untenable. Instead,IRDA should address Sebi’s concerns of mis-selling of ULIPs. Else the court may be convinced to pass orders directing the IRDA to fix the malaise in selling of ULIPs. That may be Sebi’s best shot.

The writer is a Delhi-based insurance lawyer