The High Level Coordination Committee has just functioned as a coffee club for regulatory heads
It is hard to believe that three of the four ‘independent’ regulators have dared to protest against an ordinance passed by the government in early July giving statutory powers to the finance minister as a referee on their squabbles over jurisdiction.
There can be no dispute about the need to keep regulators independent. But will the new Bill really change anything? Are regulators really independent even today? Has the High Level Coordination Committee (HLCC) of regulators worked effectively? And does independence mean lack of accountability, capricious regulation and lack of transparency?
Those taking up cudgels on behalf of regulators invariably point to the Reserve Bank of India (RBI) former governor Dr YV Reddy’s strong stand against a powerful finance minister which is credited with protecting India from the global economic crisis. But that was about the individual and not the position. After a rather shaky start, when he was seen as being unusually soft on the Andhra-based Global Trust Bank (GTB), Dr Reddy went on to play an exemplary role as a governor, even from the consumer point of view. He strengthened the customer services department, changed credit card rules and expanded the role of the Banking Ombudsman Scheme, which was made extremely effective by deputing serving RBI officers. Today, bank customers have a fairer chance of complaint redressal than investors of insurance and capital market products. But, again, it is about one individual, not the power of the post. Let’s not forget that YV Reddy was rewarded with a Padma Vibhushan and not a position in government.
Similarly, the Securities and Exchange Board of India (SEBI) was more feared and respected under GV Ramakrishna (GVR), although it had no statutory teeth. GVR ensured transparency of actions which kept vested interests inside SEBI on a tight leash. In the 17 years since then, SEBI has fully eroded that credibility and is now capricious, non-transparent and riven by conflict, discontent and corruption. More importantly, India’s retail investor population has dropped sharply from 20 million in 1992 to 8 million (according to the Swarup Committee report). In the past year, a series of rapid-fire regulatory changes have driven retail investment out of mutual funds as well. Worse, it is SEBI’s attempt to usurp the insurance regulator’s turf that led to the superfluous ordinance to settle jurisdiction issues between regulators.
The noise over the ordinance is mostly just that—noise. A media report says that SEBI had informed the finance ministry about its plan to serve show-cause notices on a select nine insurers, but it remained silent. That is the problem with selective memory.
Moneylife has pointed out that Dr KP Krishnan, joint secretary (capital markets), was already a de-facto super-regulator. On 20 April 2010, we pointed out (‘Does the root of the SEBI-IRDA fight go back to the finance ministry?’) (http://www.moneylife.in/article/8/4879.html) on how Dr Krishnan had been rooting for a Financial Stability & Development Council (FSDC) and pushing for SEBI to regulate unit-linked insurance plans (ULIPs) in various presentations since November 2009.
In effect, the bizarre tussle between SEBI and IRDA (Insurance Regulatory and Development Authority), which first landed in court and was later resolved through an ordinance, was set off by an individual, not necessarily the finance ministry. Dr Krishnan has defended his stand in The Economic Times even on 22 July 2010, where he says that deciding jurisdiction issues between regulators was never the mandate of the HLCC. Interestingly, he claims that FSDC was necessitated because laws relating to financial markets are outdated. But then, wasn’t the Financial Sector Legislative Reforms Commission (FSLRC), announced in the Budget, supposed to address precisely this?
Whatever the post-facto justification, belief was widespread that the joint secretary was already a super-regulator. Was the RBI governor unaware of this? Isn’t it a fact that as the secretary to the HLCC of regulators, Dr Krishnan, was pushing for ULIPs to be regulated by SEBI? Dr D Subbarao, who has suddenly turned vocal against the ordinance, had then followed the policy of another famous Andhraite, PV Narasimha Rao. He decided that silence and indecision would make the problem go away. And we all know the consequences.
But that’s not all. Can the RBI governor convince us that the HLCC was anything more than a coffee club for regulatory chiefs? Let me outline a number of issues on which we, the people, would have liked to see some decision-making and leadership from the HLCC and its chairman.
• For starters, can HLCC have failed to notice SEBI’s partisan approach to competition between exchanges? Why have all disputes related to exchanges landed up before the court or the Competition Commission? Was the RBI representative on the SEBI board not paying attention?
• What about the unseemly manner in which SEBI and its board of directors went about whitewashing NSDL’s (National Securities Depository Limited) role in the IPO scam of 2006? It stood by and watched SEBI discredit a two-member board committee, even though one member was a former RBI deputy governor. The board then went on to perform a quasi-judicial function at a meeting chaired by an outside director who is part of a SEBI-regulated entity. The HLCC found nothing amiss in this action.
• Did the HLCC ever review the fact that the New Pension Scheme has no takers even after the finance ministry decided to put Rs1,000 into each new account? The reason is simple. Financial literacy in India is poor and distrust of government is extremely high. In this situation, unless there is an economic incentive to sell this Pension Scheme, it will never find takers.
• Instead of recognising this reality, a former chairman of the Pension Fund Regulatory and Development Authority wanted commissions on all financial instruments to be scrapped. And SEBI duly followed by scrapping mutual fund entry-loads, without even attempting to understand what investors wanted. Shouldn’t we hold SEBI (and the two top exchanges) accountable for the stunning decline in retail investor population and the needless turmoil they have caused in the mutual fund industry, instead of a graduated focus on investor-friendly measures?
The HLCC’s failure to address all these issues and the four regulators’ failure to build investor confidence and expand the financial markets was covered up because investors switched to ULIPs (albeit due to rampant mis-selling) keeping the secondary market turnover healthy. But now that IRDA’s new regulations have made ULIPs completely unattractive, the pathetic state of India’s capital market will soon stand exposed. — Sucheta Dalal