The Reserve Bank of India, or RBI, has disputed the contention of the government that domestic financial sector regulations are archaic, signalling its resistance to the attempt by the finance ministry to rewrite laws governing this sector.
Finance minister Pranab Mukherjee had announced in the budget his government’s plan to rewrite financial sector laws through a Financial Sector Legislative Reforms Commission, or FSLRC. The aim was to simplify and streamline the legal framework to possibly suggest a completely new regulatory structure.
The trigger for this was the turf war between securities market regulator Sebi and insurance watchdog Irda over regulation of unit-linked insurance plans, or Ulips, an insurance-cum-investment product.
The lack of clarity in the laws administered by these regulators, and also RBI, was one of the reasons cited by the government for its inability to pronounce a judgement on the turf war. To address this issue, the government announced the creation of the FSLRC.
In its response to the consultation paper circulated by the government to all regulators on the new commission, RBI has said the laws now in vogue are not archaic, having stood the test of one of the greatest financial sector crises the world has seen, two years ago.
The central bank’s objections are largely on account of the terms of reference laying out clearly that the regulations are very old and out of sync with the present times, a government official with knowledge of the issue said.
Most of the financial sector laws and regulators came into existence at different points in time, leading to a certain degree of overlap and a lack of clarity in their functions and provoking turf wars.
The commission’s mandate will be to examine the kinds of inconsistencies and overlaps in financial sector laws and to work out a standard principle-based financial regulation. It may also review the structured objectives of each of the financial sector regulators so there is no overlap among supervisors when it comes to regulation of different products.
“There is a need to rewrite them to bring about coherence in overall framework in line with the requirements of the modern world,” said Ajay Shah, professor, National Institute of Public Finance and Policy, or NIPFP, an independent policy advisory body.
The preamble of the RBI Act, dating back to 1934, still mentions the move to create RBI as a temporary provision, and although numerous amendments to this legislation have been carried out, this part is yet to be erased.
There is an ongoing row between the government and the central bank over the formation of the Financial Stability and Development Council, or FSDC, with the central bank saying the council’s mandate should be restricted to discussing issues relating to financial stability.
Over the last five years, several committees, including those headed by Raghuram Rajan, advisor to the PM; Percy Mistry, financial sector expert; and UK Sinha, CEO of UTI AMC; had made out a strong case for rewriting financial sector regulations.
