ULIP mania comes to India - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
ULIP mania comes to India A  A  A

17 APRIL 2010

One of the first asset bubbles was in Holland, when prices of tulips rose, for no apparent reason, with people buying tulips only to be able to sell them to the next person at a higher price. There was a sad, wistfully amusing story of a Dutchman who sold his house and was showing off the tulip he bought with the money to a group of friends, when his horse ate it!

Last week in India, there was a tussle of ULIP (unit linked insurance policy) which are insurance policies combined with mutual funds. SEBI, the stock market regulator, and IRDA, the insurance regulator, have been in discussion over who should regulate these instruments and last week, in a bid to hasten Government decisions, which often move at the speed of a pregnant snail, banned sale of ULIPs by 8 companies. The resulting crisis meeting with the Finance Minister resulted in maintenance of a status quo, and SEBI banned sale of new ULIP schemes.

The issue is less about regulatory oversight and more about a level playing field for brokerage paid to agents selling mutual funds and ULIPs. Some time ago, SEBI had forbade mutual funds from giving upfront commission for sale of units. It was the quantum of commission that was driving business, and not the investor need. So if Fund A offered 5 % and Fund B offered 3%, the agent drove his customers towards A, often with a kick back of a part of his brokerage. This was unhealthy; the 5% ultimately comes from the investor's own pocket; his starting NAV becomes 95%. So, SEBI rightly banned upfront commission on sale of mutual funds.

However, ULIPs continued giving huge upfront commissions, as they were regulated by IRDA and the SEBI ban didn't apply. This, too, was unfair, and SEBI rightly gave the pregnant snail a little push. It does not matter who regulates it; both SEBI and IRDA are, thankfully, headed by right minded persons. What matters is for there to be a level playing field for brokers of both, and hence for investors to get unbiased advise on where to invest for their own needs, rather than for the brokers' needs.

Conflicts of interest are global. The venerable Goldman Sachs has been charged by US SEC for allowing a big investor, hedge fund manager John Paulson, to determine the constituents of a collateralised debt obligation (CDO) which was later securitised. Paulson went ahead to short he CDO by buying credit default swaps (CDS). Paulson was the highest paid fund manager, making $3.6 b. last year largely because of the big bets shorting the subprime mortgage instruments. Any collateral (sic) damage to Goldman could impact investor sentiment globally.

Remember, Goldman Sachs was also accused of helping Greece hide the true extent of its indebtedness and thus allowed it to continue spending, and borrowing, more, making the crisis worse. Last week Greece was given a $ 41b. bailout by the EU.

An Englishman would lament that conflicts of interest were not cricket, but there were plenty of conflicts of interest in cricket, in India's best known brand, the IPL. A whole can, no, make that a carton, of worms spilled over about as Lalit Modi and Shashi Tharoor (perhaps someone ought to tell him what external affairs really involves) went on a slugfest over conflicts of interest in team ownership.

The pity here is that we, in India, do not take prompt action when problems start to emerge (witness the pregnant snail in ULIP, a bubbling issue for over 2 years). We wait until the media uncovers it, often at the behest of an interested party, and then do a cover up. It is this penchant of vested interest followed by cover ups that really restrains a better performing, more equitable, economy.

It was, perhaps, vested interest that has prevented state owned telecom major BSNL, from competing effectively. It has been stymied in its attempt to grow; the tender it had awarded was held back. Meanwhile, private sector companies grew to global size and are making dollops of money. BSNL is expected to show a loss of Rs 2600 crores this year!

Infosys declared results for the March quarter, showing a 5.5% growth in revenue to Rs 5944 crores and a 1 % drop in profits to Rs 1600 crores. The stock, however, rose 4 % last week ending at 2785; its guidance for the next quarter showed an expected 18% growth in revenue in $ terms and 9% in rupee terms.

ONGC Chairman R S Sharma has stated that a gas price of $ 4.2 per mmbtu would be unviable for it to invest in further exploration, and has asked for it to be fixed at $ 7. RIL would, if this were approved, be another major beneficiary, and both of these would pull up the sensex.

The Competition Commission of India has, in response to the plea by MCX, ordered a probe whether NSE is using its clout to stymie MCX. MCX and Financial Technologies, which jointly promoted MCS-SX, a stock and currency exchange, successfully brought down their stake from 70% to 10%, as required by SEBI, diluting it to banks and other investors, who valued the exchange at a whopping Rs 6000 crores (more than the 135 year old BSE!). Perhaps that's why the stock price of FT has risen.

The BSE-Sensex fell 341 points last week, to end at 17591; whilst the NSE-Nifty dropped 99 to end at 5262. Because we are overly dependent on short term money (through P Notes) we have made ourselves vulnerable to a sudden withdrawal of it. When FII's would withdraw and what would trigger it, is anybody's guess. But its better to await a drop such a withdrawal would lead to, in order to buy. The India story is good, and would be even better if the speed of decision making improved from a pregnant snail to a lazy daschund, and were made with just a pinch of honest intentions.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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15 Responses to "ULIP mania comes to India"
Apr 25, 2010
I had a very bitter experience with ULIP recently.Their agents giving false assurances and gold coins to public on the schemes and then escapes. Public are not enlightened clearly about ULIP schemes either by agents or insurance companies for their own benifits.Many investors including myself invests in ULIP without knowing the schemes clearly and crying latter silently but cannot come out from the schemes for three years.Both private ULIPS companys and their agents cheating the investors in white collar way and such practices supposed to be banned and regulated by IRDA but unfortunately the IRDA is a silent spectator for all these cheating trade practise by ULIPS companies and more over it is shocking to note the opposition of the IRDA to SEBI for its actions on ULIPS.It seems very clear that IRDA become a partner to IRDA. Like 
Amit Kumar Baid
Apr 22, 2010
One thing which everyone forgets is about level playing field for disclosures also. In ULIP nothing is disclosed whereas in MF they disclosed each and everything Like 
dheeren c shah
Apr 21, 2010
ulip,equity mutual fund, endowment polices are too much expensive, since their born,SEBI AND IRDA MUST DO FOR REAL INVESTORS AND STOP THE UNNECESSARY CHARGES AND LOOPHOLES. Like 
Apr 20, 2010
It is very unfortunate that despite lapse of a good time and losses suffered by the investors still IRDA is favouring ULIP it is supposed that this organisation is for looking over benifits of investors and mot of Insurance companies most of which are based on foriegn once. ULIP are making these companies rocher. Every time when one withdraw from these schemes he looses and once again take a new ULip at higher rate but he dont realise.I dont know why Mr.Prakash is favouring ULIP he must be an agent or employee of a insurance co. ULIP must be stopped immediately. Like 
Apr 20, 2010
In India anything can happen.None one is here to control. What insurance companies are doing (90%) of their hot selling products are Pension ULIP plans. Agents are selling this plan to clients saying this is the best investment. After 3 or 5 years all can withdraw the money without anychages. Pension Plans has to be sold through PFRDA or dont allow the investors t withdraw the full money wihtout any taxes from the ULIP pension plans.Maximum withdrawal should be limited to 1/3 of the fund value.Otherwise the complete fund value should be taxable. Then only this misselling should be stopped. Commissions should be on the basis of the sum assured. So Agents encourage clients to take more sum assured and the Indians are covered with enough sum assured. Insurance should be treat as insurance and not as mix with with investment. Life insurance companies should be compete on the acturial expertisation.
Dr R Kapur
Apr 18, 2010
Nicely brought out. ULIP is a scam with most of the investors being misled in to buying a product that benefits the selling agent and not the buyer. Agents were offered gold coins and cash incentives to get customers to enrol for the "highest NAV" schemes by misrepresentation that one has to pay only for one year or 3 years (hiding the crucial facts).

A few grammatical errors noted in the above - one rather glaring - [SEBI had forbade..... SEBI forbade or SEBI had forbidden would have been better]
Hemant Unhelkar
Apr 18, 2010
Sorry guys for asking the wrong question. Found the great Mulrajs old ones in the archieves Like 
Hemant Unhelkar
Apr 18, 2010
Mulraj's writing skills are no less than mulkraj the writer. Extremely sharp and hard hitting with a dollop of humour makes it a must read every sunday.
Especially the comparison to 'pregnant snail' is an apt.
Where can I get hold of your old articles??
Thresiamma Dominic
Apr 17, 2010
Dear Sir,
It is being told that, Somebody's loss is somebody's Profit. Hence how can everyone gain from this market? For gaining profit somebody has to Loss his share. So how is the investment, profit,loss cycle perform?
With regards,
Thresiamma Dominic
Apr 17, 2010
every word is true ,indeed this issue should have brought to SEBI 10 years ago when ulip from bajaj life insurance came with UNIT GAIN (remember now), allocation was only 30 % of your annual premiums !
lakhs of innocent , policyholders still waiting for the principle amout.
what a scam.
sebi must feight for this good cause.
all the best sebi !
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