The Modi mould for Indian regulators

The news of the appointment of Subhash Chandra Khuntia as the insurance regulator on 1 May 2018 came as a surprise to most financial sector watchers. Of the eight people shortlisted for the final round of screening, Khuntia was the only bureaucrat, the rest were insurance industry insiders, including the serving Life Insurance Corp. of India chairman V.K. Sharma, New India Assurance chairman and managing director (CMD) G. Srinivasan, member Life at Insurance Regulatory and Development Authority of India (Irdai) Nilesh Sathe, and K. Sanath Kumar, CMD, National Insurance. The choice of a person with limited domain knowledge over others who have spent their entire careers working in this very technical industry was the surprise. Remember that it took an earlier outsider, J. Hari Narayan, the first three years of his five-year term to understand the sector. In fact, by the time he demitted office, he understood the sector so well that it went against the then government’s own agenda to allow him to continue. So what has gone into the decision to appoint an outsider as the head of a regulatory body that watches over Rs28 trillion of household savings and over Rs2.2 trillion of general insurance money?

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The new Irdai chief and the tax-GDP number

Two and a half months after T.S. Vijayan retired, the insurance regulatory body, the Insurance Regulatory and Development Authority of India (Irdai), has got its 5th chairman, Subhash Chandra Khuntia. A former chief secretary to the Karnataka government, he has his desk overloaded as he takes over the wheel of a body that regulates firms managing over Rs28 trillion of household savings through life insurance and another Rs2.2 trillion in the non-life insurance space.

The insurance regulator has been an outlier in the financial regulatory space. While disagreements with the government by independent regulators are well reported, the conduct of the insurance regulator has left policy makers, the financial sector and analysts open mouthed. Many decisions over the past few years have been in the face of global moves by regulators on issues of costs and transparency. Raising front commissions in life insurance products, repackaging what were illegal payouts as “rewards”, doing away with a persistency target to ensure that agents don’t churn policyholders and continuing with fuzzy disclosures in both life and general insurance products are just some of the actions that have left households even more vulnerable to mis-selling and outright fraud by banks and agents.

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Budgeting arbitrage into investor choices

Every time people who have defined benefit retirement plans make rules for the market, their lack of understanding comes across clearly. Take people in the Ministry of Finance for instance, and then look at what subsequent Budgets have put in place. Not only is there arbitrage between asset classes on the definition of long term, there is arbitrage within an asset class too on the basis of which product you choose to buy. If tax policy is used to nudge behaviour, there is some serious malfunction in the Indian policy that is nudging in all the wrong directions and all the wrong products.

In India we answer the question, ‘How many years does it take for an asset to become long-term?’ in different ways depending on the asset. You have to hold equity for 1 year, real estate for 2 years and debt for 3 years for the profit made to become ‘long term’. This classification of assets is against Finance 101, since both equity and real estate are asset classes that cook slowly over time. They give their best performance over a long period of time. How long is long? Data analysis done by my colleague Kayezad E. Adajania (read it here) shows that it takes about a 7-year holding period to iron out volatility in equity. The thumb rule for real estate puts the cycle at about 10 years. Market-linked debt (as opposed to relatively fixed-return debt products such as bank deposits) as an asset class for retail investors is mostly used for short-term purposes for emergency funds, for near-term cash needs and for income generation. It would be more logical to make debt go long term at 1 year and keep a 5-year threshold for long term for both equity and real estate. At the very least, policymakers need to equalize the definition of long term across asset classes.

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How are mutual funds preparing for growth?

Are mutual funds ready for exponential growth?

Speakers:

Anuradha Rao, managing director and chief executive officer, SBI Funds Management Co. Ltd

Kalpen Parekh, president, DSP BlackRock Investment Managers Pvt. Ltd

Milind Barve, managing director, HDFC Asset Management Co. Ltd

Nilesh Shah, managing director, Kotak Mahindra Asset Management Co. Ltd

Nimesh Shah, managing director and chief executive officer, ICICI Prudential Asset Management Co. Ltd

Swarup Mohanty, chief executive officer, Mirae Asset Global Investments (India) Pvt. Ltd

Moderator: Monika Halan, consulting editor, Mint

Edited excerpts of the discussion:

Monika Halan: I want to actually start with a small story. This is ending 2010. I am at an airport. I will not name the person but it is a life insurance industry CEO who met me at that airport and said, “Ye to khatam ho gayi industry (This industry is finished).” 2009 was when the front load of the mutual fund product was taken away by Mr. Bhave (ex chairman of Securities and Exchange Board of India). So he said we will just come and clean up this industry. It’s over. Fund managers will just go home.

That was 2010 and today in 2017, we’re looking at a Rs20 trillion industry. So I just want very quick opening statements to say that should we have the question mark in the topic today. This is financial year 2018. So, are we asking a question or should we be making a statement?

Let’s just start with you Swarup and just walk down the panel.

 

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