Government of India Volume I: Analysis and Recommendations

18.3. Note of dissent by P.J. Nayak
NOTES OF DISSENT
While the Commission’s Report strives to break fresh ground in several directions, and
particularly in respect of Consumer Protection and Resolution, there are two approaches
adopted with which I disagree, while otherwise being supportive of the Commission’s
recommendations. As both approaches affect significantly the structure and conclusions
of the Report, I believe their importance necessitates this Note of Dissent.
18.3.1. The Finance Ministry as a Financial Sector Regulator
The last 25 years of the evolution of financial sector regulation in India has seen a continual
empowerment of regulatory agencies. This began with the transfer of powers for capital
markets regulation from the Government to a new regulator, SEBI; led subsequently to
the establishment of other regulators for commodities, insurance and pension funds; and
has coincided with the increasing empowerment of the two principal regulators, RBI and
SEBI, through periodic amendments to Acts of Parliament under which they draw their
powers. This directional thrust in the empowerment of regulators established outside of
the Government has brought expertise into financial regulation. It is also now generally
accepted that when the Government did regulate directly, as it did for the primary capital
market through the Controller of Capital Issues, or the secondary capital market through
the stock exchange division of the Finance Ministry, the consequences were sometimes
unfortunate: new capital issues were continually grossly mis-priced, and malpractices in
the functioning of brokerage firms were commonplace.
The Commission now arrests and partly reverses this directional movement, and it
is with apprehension that one must view the very substantial statutory powers recommended
to be moved from the regulators (primarily RBI) to the Finance Ministry and to
a statutory FSDC, the latter being chaired by the Finance Minister. The Commission has
recommended that direct statutory powers be vested in the Government in matters of (i)
Capital Controls and (ii) Development. The statutory empowerment of the FSDC encompasses
(iii) Inter-Regulatory Co-Ordination; (iv) Identification and Monitoring of SIFIs; and
(v) Crisis Management.
This transfer of powers collectively constitutes a profound shift in the exercise of regulatory
powers away from (primarily) RBI to the Finance Ministry. The Finance Ministry
thereby becomes a new dominant regulator. To rearrange the regulatory architecture in
this manner, requiring new institution-building while emasculating the existing tradition
of regulators working independently of the Government, appears unwise. There is no
convincing evidence which confirms that regulatory agencies have under performed on
account of their very distance from the Government; indeed, many would argue that this
distance is desirable and has helped to bring skills (and a fluctuating level of independence)
into financial regulation.
The concept of a statutory FSDC, and the functions sought to be vested in it, are sensible
provisions and will provide much needed co-ordination between regulators, as also
the ability to steer the financial sector through periods of systemic risk. What is worrisome
is that the chairmanship of FSDC is with the Finance Ministry, as this could lead to
a government creep into the micro-prudential powers of other regulators. At present,
without statutory powers, such a creep is difficult. As an uneasy compromise, the Commission
has recommended (in Table 9.3) that an Executive Committee of the board of
FSDC be constituted which will be chaired by the regulator for banking and payments
[read Governor RBI], with managerial and administrative control, which will refer decisions
to the board of FSDC when the Committee is unable to reach a consensus. It is unlikely
that this would constitute an adequate buffer against Government creep. A superior
way of combining the needs of efficient co-ordination, the management of systemic risk
150 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION