SEBI approval required for offering ULIPs

SEBI vide order WTM/ PS /IMD/06/APR/2010 dated April 9, 2010 has stated that ULIPs (Unit Linked Insurance Plans) are a combination of investment and insurance and therefore it can be offered/launched only after obtaining registration from SEBI under section 12(1B) of the SEBI Act. SEBI stated that the investment components in ULIPS are in the nature of mutual funds which require registration with SEBI under section 12(1B) of the SEBI Act 1992.

This order has been passed against 14 insurance companies which offer ULIPS to customers. Earlier in January 2010, SEBI had issued show cause notices against these companies, as SEBI prima facie found that these companies offer ULIPs which are similar to the mutual fund schemes without obtaining registration from the SEBI. Insurance companies pleaded that ULIPs are predominantly life insurance products having an investment component. It was argued that a ULIP is insurance cover and is dependent on human life and the mere existence of an additional investment feature cannot convert a ULIP into a mutual fund. They also contended that regulations issued by IRDA are special laws for ULIPs and SEBI cannot apply the general laws applicable to tradeable securities such as collective investment schemes or mutual funds to ULIPs.

Rejecting the arguments of insurance companies, SEBI stated that a combination product containing an investment component, in any proportion, exposing investors to risks of securities market products, can be issued only after obtaining registration from SEBI and in compliance with the applicable laws. SEBI also stated that units of ULIPS have the characteristics of units of mutual funds. Units of mutual funds are “securities” as defined under Section 2 (h) of Securities Contracts (Regulations) Act, 1956. Merely because they are named as units of ULIPs, such units cannot be ousted from the ambit of definition of “securities”. As regards the contention that ULIPS were launched after following appropriate procedures and obtaining requisite permission from IRDA, SEBI said that the approval from one regulatory authority does not exempt the entity from complying with other applicable laws administered by relevant regulators. Accordingly SEBI has directed the insurance 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 in ULIPs) having an investment component in the nature of mutual funds, till they obtain the requisite certificate of registration from SEBI.

A copy of the order is available here.