Government of India Volume I: Analysis and Recommendations

TRANSITION ISSUES
5. FSAT
(c) Law + 2 years: By this time, the FRA will be fully functional and the new set
of rules will be in place. Ombudsmen will cease to exist and all pending cases
will be transferred to FRA.
(a) On acceptance: Preparation for expanding of physical and IT infrastructure,
and benches. Drafting of new procedural laws should begin.
(b) On passage of draft Code: SAT will be subsumed into the FSAT. The letterhead
will change. New procedural laws will be passed and come into effect.
6. FSDC
(a) On acceptance: The process of creating the financial system database will
begin. Regulations specifying the technical specifications, as well as frequency
of upgrading capabilities will be made. An interim Board and Sub-Committee
will begin the process of preparing for the creation of research, analysis and
process for SIFI designation.
(b) On passage of draft Code: FSDC will come into existence as a statutory entity;
and will implement all the existing research and continue capacity building.
(c) Law + 2 years: FDMC will become operational.
7. PDMA
(a) On acceptance: An interim Board, without any powers, should be set up using
an executive order. This Board will prepare for the eventual setting up of
the PDMA.
(b) On passage of draft Code: PDMA will come into existence as a statutory entity;
will implement all functions except cash management, contingent liabilities
and services to others.
(c) Law + 2 years: PDMA will become fully operational.
The draft Indian Financial Code is expected to replace a number of existing legislations,
and necessitate amendments in most other such legislations. The legislations
expected to be replaced will have to be repealed. Many issues addressed by provisions
of these legislations are directly addressed in the draft Code, albeit in a principles-based
manner. For some other issues, subordinate legislation is expected to be issued, but the
draft Code provides the general power to the regulator and the corresponding principles
to guide the regulators.
In this shift from a largely rules-based legal framework to a principles-based one,
principles in the draft Code are expected to provide regulators with the independence
to respond to problems within the financial system, using the enumerated powers given
to them in the draft Code. The use of these powers is to be guided by principles in the
draft Code, a requirement for benefits of a regulation to outweigh its costs, and a general
requirement for consultations and research. For example, instruments such as the Statutory
Liquidity Ratio (SLR) for banks and investment restrictions for insurance companies
are not directly enshrined in the draft Code, but the draft Code empowers the regulators
to make regulations on such requirements, guided by a set of principles, including one
that requires them to be risk-based.
There are also issues on which shift to a new approach is recommended, which
means that certain provisions in the existing legislations or certain legislations on the
whole will not find corresponding provisions in the draft Code, nor are they expected to be
addressed through subordinate legislation. On these issues, the Commission has taken
a considered view to recommend a move to a different approach towards regulation.
For example, in the interest of competitive neutrality and regulatory clarity, the Commission
recommends repealing all legislations that give special status to certain financial
FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION 139