Government of India Volume I: Analysis and Recommendations

INTRODUCTION
sectoral composition of GDP as well. Newer activities will enter the services and manufacturing
sectors, making the primary sector smaller, implying a reduced share of agriculture
in the overall GDP. All this means a greater role of the financial sector through the need
for effective and qualitative financial intermediation. Even by keeping aside inclusion as
an objective, the financial sector is expected to grow manifold in terms of size, strength,
and efficiency to support the growing requirements of a fast growing economy. The small
world of finance that exists in India today, howsoever effective, will not be able to cater
to the requirements of the huge economic opportunities that would be unleashed by the
growth process. Therefore, even in static terms of assuming just normal growth as envisioned
by the GDP growth rates, the financial sector needs to expand, innovate and experiment.
The agenda of inclusion magnifies this need manifold.
1.5.2. Fragility of the current system
Through its own deliberations, research, and interactions with various experts, the Commission
was convinced that the current regulatory financial structure of the Indian financial
sector regulation is not only fragmented, but also fragile. This is evident from the fact
that there is no uniform philosophy of regulation; different regulators approach similar
issues in different ways. The financial sector lacks a uniform legal process, uniform appellate
mechanism, and a uniform appointment process. This lack of coherence in the
philosophy of regulation is a fundamental weakness of the regulatory architecture.
The Commission also noted several instances where the independent/statutory regulatory
authorities were considered similar to the field agencies of the executive; instructions
are passed on to regulators as if they are extensions of the executive. This
blurred vision of agency structure needs to be corrected as statutory Independent Regulatory
Agencies (IRAs) are quite different from the traditional field agencies of the Government.
The IRAs are statutorily empowered to perform the three functions of the state –
regulation-making (legislation), administration (executive), and adjudication (quasi judicial)
– even at the perceived cost of blurring the principle of separation of powers embedded
in the Constitution. This is a conscious decision taken by the Parliament in
empowering IRAs to help efficiently perform their task for which they were created. In
order to prevent regulatory excesses, minimise ‘democratic deficit’, and make the IRAs
restrict themselves to effectively performing their mandated responsibilities, an effective
accountability framework is to be provided in the statute itself. Thus, statutory autonomy
in performing their mandate and statutory accountability mechanisms are the balancing
pillars of the principal-agent relationship while designing the IRAs.
Some of the developments in the regulatory sphere of financial markets in India in
the last few years have raised doubts on the efficacy of the current model of delegation to
regulatory authorities. Increasing tensions between the Government and the regulators,
and between the regulators, has come to the fore during this period. These internecine
steps were the result of an imperfect balancing of autonomy and accountability and a
blurred picture on the type of principal-agent relationship. It dented the basic foundations
of conditional delegation and the ability of the model to effectively regulate the
financial system.
Instances of such mutually conflicting postures adopted by regulators are many.
These include the oversight battle over Unit Linked Insurance Plans (ULIPs) between SEBI
and IRDA, the conflicts between SEBI and FMC on commodity based exchange traded
funds, the conflicts between FMC and Central Electricity Regulatory Commission (CERC)
(even when the latter is a non-financial sector regulator) on electricity futures trading,
the conflicts between Competition Commission of India (CCI) and sector-specific regulators,
the frequency with which regulated entities challenge the regulators, all of which
happened in the last few years, underlining the growing tensions and fissures in the
regulatory-institutional framework of financial sector regulation.
6 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION