Government of India Volume I: Analysis and Recommendations

NOTES OF DISSENT
A second difficulty arises on account of the specific principles adopted for the legislative
law. In the case of micro-prudential regulation, for instance, 11 principles are listed
in Table 6.9 and constitute principles of administrative and economic rationality. The resulting
law, applicable to the entire financial sector and embodying these 11 principles,
is proposed in Section 141 of the draft Indian Financial Code. If the legislative basis of a
micro-prudential law for banking (for instance) is to be restricted to these 11 principles, the
burden on regulatory law to bring greater specificity in respect of banking increases very
substantially. A mammoth superstructure of regulatory law will thus sit atop a slender
base of legislative law. Aside from the issue of whether Parliament would be comfortable
with this balance between legislative and regulatory law, such a legal structure imposes
a high burden on the quality of regulation- writing. As each regulation can be challenged
on grounds of being in violation of the principles, uncertainty about regulatory law will
persist until the courts have ruled.
This double whammy of uncertainty will be detrimental to financial contracting, including
new product design and sales behaviour across the financial sector. Financial
sector contracts gain in strength when the interpretation of contracts is understood by
general consensus ex-ante, before the contract is entered into, rather than ex-post, after
interpretation by courts. While it may be true that a principles-based system will settle
into its own equilibrium over a period of years, the likely travails associated with that
until then appear disproportionate to the benefits. A more rules-based approach to the
writing of financial sector law would have been preferable.
152 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION