Government of India Volume I: Analysis and Recommendations

CAPITAL CONTROLS
2. Absence of judicial review: Currently, for violations of any regulations, direction or contraventions
of ‘conditions subject to which any authorisation’ is issued by the RBI, administrative hearings
are conducted by first, ‘adjudication officers’ and second, by ‘Special Directors (Appeals)’.
Adjudication officers can begin inquiry only upon receipt of a complaint from an ‘authorised person’.
While contravention of conditions of approval of RBI can be a cause of action, ‘failure to
grant an approval’ by the RBI or the Foreign Investment Promotion Board is conspicuous by its
absence. Typically, the RBI regulation of capital flows has been seen purely as an act of monetary
policy under the discretion of the central bank and not a regulatory action worthy of legal
appeals. Appeals from decisions of Special Director (Appeals) lie to a tribunal created by the Central
Government. A person aggrieved by a decision or order of the appellate tribunal created by
the Central Government must file an appeal to the appropriate High Court.
3. Absence of clear and consistent drafting: Capital controls regulations, as currently articulated,
are ambiguous and inconsistent which increases the transaction costs for investors. At any
given level of convertibility, an ad hoc administrative arrangement of sometimes overlapping,
sometimes contradictory and sometimes non-existent rules for different categories of players
has created problems of regulatory arbitrage and lack of transparency. These transactions costs
increase the cost of capital faced by Indian recipients of foreign equity capital.
8.3. Proposed framework
India now has an open current account. Under the draft Code, there is a liberalised regime
where foreign exchange for the purposes of current account transactions can be freely
brought into the country or taken out of the country. This will be subject only to tax and
money laundering considerations, as currently applicable.
The capital controls framework in India must address the difficulties in the present
framework and seek to rationalise and unify rule making. The design of the draft Code on
capital controls focuses on accountability and legal process, and leaves the questions of
sequencing and timing of capital account liberalisation to policy makers in the future.
The Commission deliberated at length on the proposed framework on capital controls.
One view was that the imposition of controls on capital flows are essentially based
on political considerations. Hence the rule-making on capital controls must vest with
the Central Government. Empowering the regulator to frame regulations on capital controls
creates difficulties in articulating the objectives that should guide the regulator while
framing regulations on capital controls. Another view was to give the regulator enhanced
regulation making powers as it directly interact with market participants. The Commission,
however recommends a mixed formulation. The rules governing capital controls on
inward flows and consequent outflows i.e. repayment of the principal amount, should be
framed by the Central Government, in consultation with the RBI. The regulations governing
capital controls on outward flows should be framed by the RBI, in consultation with
the Central Government.
Table 8.1 enunciates the design of the proposed framework on capital controls.
8.3.1. Rules and regulations on capital controls
The rules on inward flows will be made by the Central Government and the RBI will make
regulations on outward flows. The rule making and regulation making will be a consultative
process between the Central Government and the RBI. The consultations will
be documented and may also be guided by national security considerations. Table 8.2
details the rule and the regulation making process recommended by the Commission.
As is the case today, the oversight of reporting and supervisory powers over intermediaries
in capital controls, the authorised dealers, will be placed with the RBI, till such time
capital account convertibility is not achieved. As is the case currently, the Financial Intelligence
Unit would have a role in monitoring these flows for purposes of addressing
money-laundering and related matters.
FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION 83