Srikrishna panel moots Indian Financial
Code Bill
SPECIAL CORRESPONDENT
NEW DELHI, March 29, 2013
Aiming to reform financial
sector regulations for the longer term in keeping with systemic risks involved
in financial management, the government-appointed Financial Sector Legislative
Reforms Commission (FSLRC) headed by Justice B. N. Srikrishna has proposed an
Indian Financial Code Bill to enable creation of a unified financial regulator
while limiting the role of the Reserve Bank of India (RBI) to monetary
management.
As per the proposed
regulatory architecture recommended by the Commission, whose report was put in
public domain on Thursday, the unified financial agency (UFA) — and not a
unified financial regulator, the commission has asserted — will comprise four
existing agencies which will be merged into one. These are the Securities and
Exchange Board of India (SEBI), the Forward Markets Commission (FMC), the
Insurance Regulatory and Development Authority (IRDA) and the Pension Fund
Regulatory and Development Authority (PFRDA).
Envisioning a full
transition into a set of small and implementable measures, the FSLRC said the
“existing RBI will continue to exist, though with modified functions.” In all,
the Commission suggested seven agencies and each of them will have distinct
functions.
Apart from the RBI along
with the UFA, the Commission has suggested Financial Sector Appellate Tribunal
(FSAT), Resolution Corporation, Financial Redressal Agency, Public Debt
Management Agency and FSDC (Financial Stability and Development Council). The
existing Securities Appellate Tribunal (SAT), it said, will be subsumed into
FSAT and the existing Deposit Insurance and Credit Guarantee Corporation of
India (DICGC) will be subsumed into the Resolution Corporation.
While the existing FSDC
will continue to exist though with modified functions and a statutory
framework, the Commission has recommended two new creations – a Financial
Redressal Agency (FRA) and a new Debt Management Office. The draft Indian
Financial Code Bill containing 450 clauses and six schedules is to give effect
to its recommendations.
Explaining why the vast
changes in the system of financial regulation and management is necessary, the
report said: “The Commission is mindful that over the coming 25 to 30 years,
Indian GDP is likely to become eight times larger than the present level, and
is likely to be bigger than the United States GDP as of today...The aspiration
of the Commission is to draft a body of law that will stand the test of time.”
The Commission, which
submitted its report to Finance Minister P. Chidambaram last week, had 10
members, apart from its Chairman Mr. Justice Srikrishna. It may be recalled
that with a view to strengthening the mechanism for maintaining financial
stability, financial sector development and inter-regulatory coordination, the
government, in consultation with the financial sector regulators, had set up
the FSDC in December, 2010.
Implementation of the
report, however, is not expected to be smooth. For, apart from the legislative
changes required through Parliamentary approval, the fact that the Commission’s
recommendations are marked by dissenting notes by four members — P. J. Nayak,
K. J. Udeshi, Y. H. Malegam and Jayanth R. Varma on a host of specific issues
is an indications of the hurdles in the way. This is despite the fact that the
report said: “The Commission believes that this proposed financial regulatory
architecture is a modest step away from present practice, embeds important
improvements, and will serve India well in coming years.”
Arguing the need for the
changes recommended, the report said the actual functioning of the regulator
lies in three areas —- regulation-making, executive functions and
administrative law functions.
As for capital control, it
said the Finance Ministry should make rules for inbound capital flows, while
the onus of making rules for outbound capital flows should rest with the RBI.
However, one of the dissent notes pertains to this provision.
The FSLRC went on to say:
“At present, in India, there is a confusing situation with regulators utilising
many instruments such as regulations, guidelines, circulars, letters, notices
and press releases. The draft Code requires all regulators to operate through a
small number of well defined instruments only”.
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