From the aftermath of the Harshad Mehta securities scam in the early 1990s to the latest proposed changes in India's insurance sector, financial regulation has often brought significant disruption to established players. However, Deepak Shenoy, CEO of Capitalmind, views such interventions not as obstacles but as essential components for fostering a more reliable financial system.
“Every regulatory change tends to have something that will hurt incumbents or players in the industry. This is part of the growth process: a feature, not a bug,” Shenoy stated, emphasizing that short-term pain is often the necessary cost of building lasting trust.
Lessons from the Harshad Mehta Era
Shenoy points to the market crisis of the early 1990s as a foundational example of how regulatory intervention can fundamentally reshape an industry. The Harshad Mehta episode exposed critical flaws in the existing exchange structure, leading to the emergence of the National Stock Exchange (NSE) and a significantly expanded role for the Securities and Exchange Board of India (SEBI).
Further reforms in securities markets included stringent restrictions on brokers' use of client securities, enhanced corporate disclosures, and crucial changes within the mutual fund industry. While some of these regulations impacted players who were operating ethically, Shenoy argues the overarching result was a dramatic increase in investor confidence.
“The trust that SEBI has generated in the securities ecosystem has allowed financial investments to flourish,” Shenoy noted, highlighting the long-term benefits of a robust regulatory framework.
Current Insurance Reforms: A Similar Dynamic
A similar dynamic is now unfolding in the insurance sector, where the Insurance Regulatory and Development Authority of India (IRDAI) has proposed comprehensive changes. These reforms target distribution economics, commissions, insurer expenses, and customer protection, aiming to enhance transparency and fairness.
Key proposals include allowing consumers to access detailed product information—such as prices, performance data, and quality metrics—without first being required to provide personal details like phone numbers or email addresses. IRDAI has identified the practice of demanding personal information before displaying basic product details as a potential “dark pattern” and seeks to prohibit it.
Addressing Commission Growth and Transparency
The IRDAI consultation paper also suggests lower limits on first-year commissions for life insurance and a five-year reduction in Expense of Management limits. This comes amidst observations of a significant divergence between premium growth and commission increases in certain channels. For instance, between FY23 and FY25, general insurance premiums generated through brokers rose 37%, while commissions surged 173%. In life insurance, corporate agent premiums grew 28%, with commissions increasing 125%.
Regulators argue that such trends can shift market competition away from product quality and pricing towards sales incentives, potentially disadvantaging policyholders.
Short-Term Pain for Long-Term Trust
For Shenoy, the immediate impact on insurers and distributors, though potentially challenging, must be viewed in the context of the broader goal of building market trust. He acknowledges that more regulations will likely come, affecting various financial segments, but reiterates that this is the inevitable cost of fostering a more trustworthy environment.
While advocating for robust regulation, Shenoy also emphasizes the importance of open discussion to refine or reverse rules that might inadvertently hinder investor benefits. His overarching message to investors and industry participants is that regulatory pressure, while creating risks, also generates opportunities for businesses that prioritize fair practices and transparency. Ultimately, he believes this approach leads to not just growth, but better growth for the Indian financial system.