Sucheta Dalal :Walking the Regulatory Tightrope
Sucheta Dalal

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Walking the Regulatory Tightrope  

March 10, 2010

Finance minister Pranab Mukherjee’s Budget speech had two interesting announcements—the setting up of the Financial Stability and Development Council (FSDC) and the Financial Sector Legislative Reforms Commission (FSLRC). Five days after the Budget, the government had still to announce the chairperson and members of these bodies. So their significance, if any, will depend on who heads them and whether they make a difference to policy and procedures or end up as just another load on the exchequer.

The FSDC has attracted a lot of comment, because some believe this will be a super-financial regulator of sorts and, by operating across the turfs of various independent regulators (banking, pension, insurance, capital market), it will also cut them down to size. This is hard to believe. For starters, the finance minister (FM) himself has made it clear that he is neither planning on the FSDC replacing the High Level Coordination Committee (HLCC) on Financial Markets, nor giving it over-riding powers over independent regulators.

Some are attributing FSDC’s creation to the Raghuraman Rajan committee’s recommendation for a ‘financial sector oversight agency’ which would be mandated to assess macro-economic risks and risk concentration, monitor the functioning of financial conglomerates, initiate ‘balanced action’ by concerned regulators and ‘address and defuse regulatory conflicts’. Having laid out such extensive agenda for this authority, the Rajan committee wanted its composition to be the same as the HLCC, except that it would have a permanent secretariat. In recent times, the HLCC has proved itself incapable of resolving issues between IRDA (Insurance Regulatory and Development Authority) and SEBI (Securites and Exchange Board of India), while the finance ministry too has watched on silently.

Clearly, the HLCC with a permanent secretariat will not work. Fortunately, the finance minister does not seem to have this in mind. However, if FSDC ends up as a super-regulator, it will only concentrate powers into a single entity, which, in the Indian context, will continue to be dictated to by the finance ministry. Worse, the government will have no qualms about leaving these already weakened regulatory bodies rudderless for long periods. This cannot be good. If India escaped the global financial crisis, it is because Y Venugopal Reddy stood up to an extremely abrasive and opinionated finance minister and a cabal of economic-lobbyists peddling free-market mythology. But he was fed-up enough not to want another term. Today, the insurance, pensions and capital market regulators are already weak institutions and mindless bureaucracies. We will make them weaker by opting for a super-regulator. As for FSDC ensuring financial stability through effective and timely policy adjustments—it would only work if the Commission is headed by a strong and independent chairperson; but it could just as easily end up as a sinecure for yet another retired bureaucrat who has spent a lifetime aligning himself with his political masters.  

The FSLRC, which had attracted far less attention, is meant to rewrite and clean up financial sector laws to bring them in line with the modern requirements of the sector. If that is all the Commission is to do, it can probably wind up its work in a few months. Several academics have already identified superfluous and archaic laws and their conflicting or ambiguous interpretation and application in the past.

There is a slew of un-implemented recommendations that can be collated and acted upon in a matter of months, if there is a will to implement them. After all, we have always excelled in churning out reports full of recommendations. The Administrative Reforms Commission, set up by the UPA government in its previous term, submitted 15 reports of which 10 were examined and 800 recommendations identified for implementation. Of these, it is claimed that 350 have been implemented and 450 are under implementation. Evidently, so much of diligent implementation has still not led to any perceptible improvement in the aam aadmi’s dealings with the mind-numbing sloth and corruption that characterise government bureaucracies.

Hopefully, the government is planning to give the Commission a role that goes beyond re-examining superfluous, ambiguous and archaic laws, rules and regulations, but also the process of implementing the many new statutes and regulations.

An issue that needs urgent attention is the manner in which quasi-judicial responsibilities are being discharged by the existing regulators. Among the worst examples is the capital market regulator. There is no standard format in issuing orders and no attention to the fact that these orders will form a precedent. There is also far too much power concentrated in the hands of whole-time members of SEBI. Consequently, they can destroy businesses through their thoughtless actions or, as we have repeatedly reported, let off serious offenders with a mere warning or tiny penalty, as per their wishes and intent.

So many of its consent orders deliberately (we think) do not provide any detail about specific allegations against the companies or market intermediaries and there is no way to figure out whether the payment made under the consent terms is commensurate with the alleged offence or violation.

Worse, none of these orders is posted on a searchable database that an alert investor can use while choosing to do business with a financial intermediary. This is one of the reasons why millions of investors have been disappearing from the capital market. Pranab Mukherjee's Budget suggests that he is far more pragmatic than his predecessor and more open to public feedback. Hopefully, he will ensure that both FSDC and FSLRC have a clear mandate and visionary leadership that will not just add to the mountain of mothballed reports and stifling red-tape.

-- Sucheta Dalal