SEBI and IRDA cross swords once again Apr 16, 2010

SEBI and IRDA cross swords once again

April 16, 2010

Weekly Facts
	Close	Change	%Change
BSE Sensex	17,639.26	75.1	0.42%
Re/US$	44.44	0.3	0.61%
Gold Rs/10g	16,750.00	90.0	0.54%
Crude ($/barrel)	85.74	0.8	0.93%
FD Rates (1-Yr)	5.00%-6.50%

Weekly change as on April 15, 2010

SEBI and IRDA cross swords once again

Impact

Last week, the Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA) crossed swords once again on the issue of regulating Unit-Linked Insurance Plans (ULIPs). SEBI restrained 14 private insurance companies from raising fresh money through ULIPs, on the contention that ULIPs are more of an investment product; which are similar in nature to mutual funds and therefore ULIPs fall under SEBI’s regulatory jurisdiction.

"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," the order said.

But, as expected, after a couple of days the Government intervened. Both the regulators were persuaded to seek a legal mandate from the court and seek clarification on the jurisdiction issue. The Finance Minister asked that status quo ante be maintained on this issue, thus enabling insurance companies not to be hobbled from issuing ULIPs, for now. The debate on this continues even as we write this.

Aegon Religare, Aviva Life, HDFC Standard Life Insurance, Max New York are among the 14 insurance companies who have been restrained from issuing fresh ULIPs.

We feel that this tussle has the industry on tenterhooks. It doesn't really matter who continues to regulate ULIPs as long as that regulator addresses policy holders' needs in the following form:

Reduced commissions (even no commissions!)

Transparency through better disclosure norms

Ethical sales practices

Investor education

We at Personal FN have always advocated that an investor's insurance needs and investment decisions should be dealt with separately. For insurance, one must focus only on pure term insurance policies; because when we talk about life insurance we refer to indemnifying life risk and we are not referring to making investments. In line with this belief, we have recommended that investors consider term policies only. However, going forward if the aforementioned issues are appropriately addressed by the regulator, ULIPs might be worth looking into, as an "investment cum insurance" option.

IIP numbers still in good spirits

Impact

(Source: CSO)

The Index of Industrial Production (IIP) for February 2010 grew by 15.1% over last year's figure (February 2009). This was the fifth consecutive month that the IIP numbers have been in double digits. According to the quick estimates released by the Central Statistical Organisation (CSO), the rise in IIP is broad based and is on account of:

Strong manufacturing growth - The manufacturing index, which is the principal component of the IIP, grew by 16.0% over the last year

Robust expansion in output - Output of capital goods grew over the last year by 44.4%, followed by growth in output of intermediate goods and consumer goods of 15.6% and 8.9% respectively

Low interest rates and improving employment prospects also triggered a spending boom that led to record sales of cars, motorcycles and television sets.

An IIP number such as this one is a positive economic signal; however IIP numbers are critical input points in the RBI monetary policy review, to be held on April 20, 2010. A positive IIP number will support RBI's decision to tighten the monetary policy i.e. implement a rate hike, which could dampen sentiments in the equity markets. We can expect the RBI to hike policy rates (repo and reverse repo rates) by up to 50 basis points and / or increase the Cash Reserve Ratio (CRR) by 25 basis points, thereby pulling money out of the economy.

Tax Sops on education loan extended to all streams

Impact

The Government of India extended the tax concession on interest paid for educational loans to all streams of education, including vocational courses, by amending Section 80E of the Income Tax Act. Hence from the academic year 2010-11, education loans taken for vocational courses and education streams of arts and commerce will also be available for deduction under Section 80E.

Until now, the exemption was restricted to loans for graduate and post-graduate courses in engineering, medicine and management, and post-graduate courses in applied sciences or pure sciences including mathematics and statistics.

"The latest amendment in Section 80E of the Income Tax Act will bring all the streams of education (apart from the regular ones) and vocational courses under its ambit. This will benefit the students who apply for graduate and postgraduate courses in various streams during the upcoming academic session," a senior Finance Ministry official said.

The income tax benefit on such loans is also extended to parents who legally adopt a child. This will thus encourage individuals to adopt a child with less to worry about the expenses of the child's education.

We believe that the move made by the Government is in the larger social interest, since it benefits individuals from all economic strata opting for higher studies, from this academic session

INTERVIEW

In an interview with CNBC - TV18, Mr. Ramesh S. Damani, Member of Bombay Stock Exchange Ltd. shared his views on the Indian equity markets.

According to him we are in a low volatile and fairly stable sort of market scenario. However he is of the opinion that the BSE Sensex will have a hard time getting back to the 21,000 mark that it hit previously. "The markets will be a under pressure with the high being 21,000 and low being 15,000-16,000. I would be surprised if the market made a decisive new high in calendar year 2010", he said.

He also mentioned that it will be prudent for investors to adopt the hold strategy, since the viciousness in the fall, which was experienced two years back, is unlikely to be repeated now. He said that there aren’t any bubble formations in the Indian equity markets.

Mr. Damani also expressed that he adopts the bottom-up approach to stock picking and finds "value stocks" in doing so.

AND OTHER NEWS...

Residential projects are set to be slightly more expensive. Capital values in the residential real estate space will increase marginally by 2-3% in 2010, said a report by research and consultancy firm Crisil Ltd. The study titled "City Real(i)ty", which covers 10 Indian cities said Mumbai witnessed steepest rise in capital values, while Chandigarh saw maximum fall in mid-2009.

FOR AN INDEPTH REAL ESTATE INTERVIEW WITH MR. PRANAY VAKIL - CHAIRMAN OF KNIGHT FRANK (INDIA) PVT. LTD., MUMBAI, WATCH THIS SPACE!

The World Gold Council said that gold imports this year by India may match or exceed the amount bought in the year 2009, as economic growth and a stronger local currency boost consumer confidence.

India Meteorological Department (IMD) chief, Ajit Tyagi said a poor monsoon is unlikely this season (2010). In 2009, the worst monsoon in 37 years caused widespread losses in key crops like oilseeds and sugarcane, which led to double-digit food inflation during the year 2009-10.

With food inflation at a 16 month high (17.7% for the week ended March 27, 2010), Financial Services Secretary, R. Gopalan said "I share the views of experts that some amount of tightening (of interest rates by RBI) is required".

Inflation as measured by the Wholesale Price Index (WPI) rose to 9.90% in March 2010, from 9.89% in February 2010.

India is poised for economic growth of 8.2% in 2010, but the rising inflation will be a concern, the Asian Development Bank (ADB) said in a report. The report has also estimated the expansion in the Indian economy by 8.7% in 2011.

Improving domestic demand and strong signs of economic recovery have helped to push up investor sentiments in India, an ING survey said. The India Investor Sentiment Index rose to 174 in the first quarter of 2010 from 169 in the fourth quarter of 2009.

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