Government of India Volume I: Analysis and Recommendations

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5. A new Financial Redressal Agency (FRA) will be created. 6. A new Debt Management Office will be created. EXECUTIVE SUMMARY 7. The existing FSDC will continue to exist, though with modified functions and a statutory framework. The functions of each of these seven proposed agencies are as follows: Reserve Bank of India It is proposed that RBI will perform three functions: monetary policy, regulation and supervision of banking in enforcing the proposed consumer protection law and the proposed micro-prudential law, and regulation and supervision of payment systems in enforcing these two laws. Unified Financial Agency The unified financial regulatory agency would implement the consumer protection law and micro-prudential law for all financial firms other than banking and payments. This would yield benefits in terms of economies of scope and scale in the financial system; it would reduce the identification of the regulatory agency with one sector; it would help address the difficulties of finding the appropriate talent in Government agencies. This proposed unified financial regulatory agency would also take over the work on organised financial trading from RBI in the areas connected with the Bond-Currency-Derivatives Nexus, and from FMC for commodity futures, thus giving a unification of all organised financial trading including equities, government bonds, currencies, commodity futures and corporate bonds. The unification of regulation and supervision of financial firms such as mutual funds, insurance companies, and a diverse array of firms which are not banks or payment providers, would yield consistent treatment in consumer protection and micro-prudential regulation across all of them. Financial Sector Appellate Tribunal The present SAT will be subsumed in FSAT, which will hear appeals against RBI for its regulatory functions, the unified financial agency, decisions of the FRA and some elements of the work of the resolution corporation. Resolution Corporation The present DICGC will be subsumed into the Resolution Corporation which will work across the financial system. Financial Redressal Agency The FRA is a new agency which will have to be created in implementing this financial regulatory architecture. It will setup a nationwide machinery to become a one stop shop where consumers can carry complaints against all financial firms. Public Debt Management Agency An independent debt management office is envisioned. Financial Stability and Development Council Finally, the existing FSDC will become a statutory agency, and have modified functions in the fields of systemic risk and development. The Commission believes that this proposed financial regulatory architecture is a modest step away from present practice, embeds important improvements, and will serve India well in coming years. Over a horizon of five to ten years after the proposed laws come into effect, it would advocate a fresh look at these questions, with two possible solutions. One possibility is the construction of a single unified financial regulatory agency, which would combine all the activities of the proposed Unified Financial Authority and also the work on payments and banking. Another possibility is to shift to a two-agency structure, with one Consumer Protection Agency which enforces the proposed consumer protection law across the entire financial system and a second Prudential Regulation Agency which enforces the micro-prudential regulation law across the entire financial system. In either of these paths, RBI would then concentrate on monetary policy. These changes in the financial regulatory architecture would be relatively conveniently achieved, given the strategy of emphasising separability between laws which define functions, and the agencies that would enforce the laws. Over the years, based on a pragmatic assessment of what works and what does not work, the Government and Parliament can evolve the financial regulatory architecture so as to achieve the best possible enforcement of a stable set of laws. xxvi FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION
EXECUTIVE SUMMARY The outputs of the Commission The main result of the work of the Commission is the draft ‘Indian Financial Code’, a single unified and internally consistent draft law that replaces a large part of the existing Indian legal framework governing finance. As has been emphasised earlier, the use of simple English should help ensure that everyone connected with the field would be able to understand the draft Code. This relatively large draft law – which is comprised of 450 sections – constitutes Volume II of the report. Volume 1 expresses the arguments that led up to the key decisions embedded in the draft Code. The Commission vigorously debated the ideas expressed in the draft Code over a period of two years, in twenty four full-day meetings. In any law of 450 sections, there are bound to be certain areas of disagreement. The five areas of disagreement within the Commission, which are expressed in four dissent notes, are as follows: 1. Authorisation requirements: Prof. Jayanth Varma expresses concerns about the authorisation requirements for financial service providers. 2. Capital controls: Mrs. K. J. Udeshi, Dr. P. J. Nayak and Mr. Y. H. Malegam disagree with allocation of responsibilities on capital controls between the Ministry of Finance and RBI. 3. The role of the Ministry of Finance: Dr. P. J. Nayak disagrees with the role envisaged for the Ministry of Finance in draft Code especially the role of the FSDC. 4. Common-law tradition, principles-based law. Dr. P. J. Nayak expresses concerns about the strategy of the Commission that has favoured a common law, principlesbased approach. 5. Regulation of Non-Banking Financial Company (NBFC)s: Mr. Y. H. Malegam disagrees with the allocation of regulatory responsibilities for NBFCs. Conclusion Financial economic policy is implemented by front-line agencies who are assigned functions by Parliament. The main purpose of financial law is to put these agencies on a sound footing, with the trio of objectives, powers and accountability mechanisms. Commission has focused itself upon this task, of establishing a sound regulatory process. Most policy debates in the field of finance pertain to the subordinated legislation that is drafted by financial regulatory agencies. The work of Commission does not directly engage with these debates. As an example, Commission does not have a view on the timing and sequencing of capital account liberalisation. Similarly, a large number of the recommendations of the Working Groups which studied individual sectors fall in the domain of modifications to subordinated legislation. The work of Commission is focused on the incentives in public administration that shape the drafting and implementation of subordinated legislation. As a consequence, while the Commission has fully taken cognisance of the policy problems analysed by the expert committees of the last five years, and by its own Working Groups, it does not directly address them. When the proposals of Commission are enacted by Parliament, they will set in motion a modified set of incentives in public administration. Clear objectives in law, and a sound regulation-making process, will improve the quality of subordinated legislation that is issued by regulatory agencies. The emphasis on legal process in the laws drafted by Commission will induce improved working of the supervisory process. A common consumer protection law will greatly benefit the users of financial services. These elements will yield a gradual process of change. The Commission is mindful that over the coming 25 to 30 years, Indian GDP is likely to become eight times larger than the present level, and is likely to be bigger than the United FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION xxvii
Page 1: Government of India _______________
Page 5 and 6: Contents Acronyms . . . . . . . . .
Page 7: CONTENTS 12 Public debt management
Page 10 and 11: ACRONYMS FSAT Financial Sector Appe
Page 13 and 14: Acknowledgement When the Ministry o
Page 15: ACKNOWLEDGEMENT appreciate the effo
Page 18 and 19: EXECUTIVE SUMMARY rience till date.
Page 20 and 21: EXECUTIVE SUMMARY out many processe
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Page 26 and 27: EXECUTIVE SUMMARY to analyse one co
Page 28 and 29: Contracts, trading and market abuse
Page 32 and 33: EXECUTIVE SUMMARY States GDP as of
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Page 36 and 37: INTRODUCTION amendments frequently
Page 38 and 39: INTRODUCTION sectoral composition o
Page 40 and 41: INTRODUCTION The Commission has und
Page 43 and 44: CHAPTER 2 The tasks of financial la
Page 45 and 46: THE TASKS OF FINANCIAL LAW This is
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CONSUMER PROTECTION using or disclo
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CONSUMER PROTECTION providers. The
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CONSUMER PROTECTION Table of Recomm
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CHAPTER 6 Micro-prudential regulati
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MICRO-PRUDENTIAL REGULATION let tha
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MICRO-PRUDENTIAL REGULATION Table o
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MICRO-PRUDENTIAL REGULATION PRINCIP
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MICRO-PRUDENTIAL REGULATION the oth
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RESOLUTION payment systems. The cor
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RESOLUTION Commensurately, the corp
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Table of Recommendations 7.3 Intera
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Table of Recommendations 7.5 Powers
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Table of Recommendations 7.7 Fundin
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CHAPTER 8 Capital controls Capital
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CAPITAL CONTROLS 2. Absence of judi
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CAPITAL CONTROLS Table of Recommend
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CAPITAL CONTROLS Table of Recommend
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Table of Recommendations 9.1 Object
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Table of Recommendations 9.3 Establ
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SYSTEMIC RISK filings by financial
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SYSTEMIC RISK Table of Recommendati
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egulatory agencies. In such a situa
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FINANCIAL INCLUSION AND MARKET DEVE
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FINANCIAL INCLUSION AND MARKET DEVE
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Table of Recommendations 11.1 Objec
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Table of Recommendations 11.2 The m
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Table of Recommendations 11.3 Board
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CHAPTER 12 Public debt management 1
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PUBLIC DEBT MANAGEMENT of the publi
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PUBLIC DEBT MANAGEMENT State Govern
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PUBLIC DEBT MANAGEMENT Table of Rec
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CHAPTER 13 Foundations of contracts
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FOUNDATIONS OF CONTRACTS AND PROPER
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14.2. Problems of the present arran
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FINANCIAL REGULATORY ARCHITECTURE T
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FINANCIAL REGULATORY ARCHITECTURE w
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TRANSITION ISSUES On the functional
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TRANSITION ISSUES service providers
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SUMMARY OF RECOMMENDATIONS NOT EMBE
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CHAPTER 17 Conclusion Financial eco
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18.2. Note of dissent by K.J. Udesh
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18.3. Note of dissent by P.J. Nayak
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NOTES OF DISSENT A second difficult
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NOTES OF DISSENT 6. The present arr
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CHAPTER 19 Annexes 19.1. Formation
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ANNEXES 19.2. List of consultants,
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ANNEXES * Did not participate in th
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ANNEXES 19.5. Interactions with aut
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ANNEXES (c) Examine whether informa
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ANNEXES 2. General development of m
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ANNEXES 19. Role of surveyors: (a)
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ANNEXES 6. The law must provide for
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ANNEXES 31. Resolution of insurance
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ANNEXES 3. As shocks can spread thr
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ANNEXES 19.8.2. Terms of Reference
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ANNEXES (d) The Board of the target
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ANNEXES 2. The PDMA should adopt a
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ANNEXES 3. On the issue of co-opera
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ANNEXES 14. Regulators must look at
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ANNEXES 31. The WG recommends the m
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ANNEXES (b) Efficiency of DRT: Suit
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ANNEXES (c) Pledged shares and exem
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ANNEXES 19.11. Interactions by the
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ANNEXES 19.13. Submissions to FSLRC
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