Government of India Volume I: Analysis and Recommendations

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THE TASKS OF FINANCIAL LAW be framed by the Central Government, in consultation with the RBI. The regulations governing outward flows should be framed by the RBI, in consultation with the Central Government. 5. Systemic risk: Micro-prudential regulation focuses on one financial firm at a time. While this is important in its own right, there is a requirement for an additional, and different, perspective on risk of the financial system as a whole. This requires analysis of the entire financial system, understanding the build-up of risk across all elements of the financial system, and undertaking co-ordinated actions (through multiple regulatory agencies) to reduce the probability of a systemic crisis. The terms financial stability and macro-prudential regulation are sometimes used in this discourse. The Commission has chosen to consistently use the phrases systemic risk and systemic risk regulation as they lend greater clarity in communicating the problem and the task. 6. Development and redistribution: In addition to the above components of financial law, financial economic governance in India is also charged with the objectives of development and redistribution. At the same time, these functions need to be placed on sound legal foundation. 7. Monetary policy: The conduct of monetary policy is covered by a law that establishes the central bank and defines the triad of objectives, powers and accountability mechanisms. 8. Public debt management: A specialised framework on public debt management is needed to cover the function of analysing the comprehensive structure of liabilities of the Government, and embarking on strategies for minimising the cost of raising and servicing public debt over the longterm within an acceptable level of risk. 9. Foundations of contracts and property: A specialised framework setting out the foundations of financial contracts, and making adaptations to general commercial laws, is required for the proper functioning of the financial system. Each of these components is associated with a chapter in this report and a part in the accompanying draft Indian Financial Code (‘draft Code’). 2.1. Shifting away from a sectoral perspective The discussion above has focused on nine areas of work: ◮ Consumer protection ◮ Micro-prudential regulation ◮ Resolution ◮ Capital controls ◮ Systemic risk ◮ Development ◮ Monetary policy ◮ Public debt management ◮ Foundations of contracts and property The Commission has prepared a draft Code covering these nine areas. The draft Code also contains a specialised law to address governance processes associated with regulators and other financial agencies, addressing the problems of independence and accountability. Putting these ten elements together, the draft Code constitutes a fairly comprehensive and unified treatment of financial law. This strategy differs from the current Indian law, which is sectoral in nature. Current laws are organised around sub-sectors of finance, such as securities or insurance or payments. The Commission debated this at length, and concluded that there was merit in shifting to a non-sectoral approach. Laws must be animated by an economic purpose and the market failures that they seek to address. Once this is done, the ideas apply consistently across all sectors of finance. As an example, a well drafted micro-prudential law would apply to all components of finance. A well drafted regulatory governance law would apply to all financial agencies. 12 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION
THE TASKS OF FINANCIAL LAW This is a superior approach from many points of view. Shifting away from sectoral laws yields consistent treatment across sectors. It has become increasingly clear that the lines that separate banking or insurance or mutual funds or pension fund management are hard to define. Under this situation, if sectoral laws are applied, regulatory arbitrage becomes feasible, where the same activity is portrayed as belonging in the sector where the law is conducive to a higher profit rate. Non-sectoral laws that apply uniformly across the financial system eliminate such inconsistencies of treatment. They also eliminate the problems of gaps and overlaps. While the draft Code proposed by the Commission is non-sectoral in nature, it is likely that regulators will draft sector-specific subordinated legislation. For example, the principles of consumer protection, embedded in the consumer protection part of the draft Code, will be translated by multiple regulatory bodies into detailed regulations that shape how consumers of banking or insurance are treated. The subordinated rules and regulations will, however, have to be consistent with the broad principles laid down in the primary law. As an example, the term NBFC in India includes a wide array of activities. Rational and consistent treatment of a broad class of firms requires a clear conceptual framework. The approach taken by the Commission emphasises that regulation should flow from the economic and legal concern that the law seeks to address. It is useful to focus on the regulatory concerns associated with the main NBFC activities: deposit-taking, raising capital through securities issuance, and lending to consumers and investment. Under the framework proposed by the Commission, all these activities would be analysed through the objectives and powers contained in the draft Code under the parts on microprudential regulation, consumer protection and resolution. As an example, when a NBFC gives a loan to a consumer, the regulatory focus would be on consumer protection. If a NBFC does not take deposits, the nature of promises made to consumers changes, and the micro-prudential regulatory strategy would be correspondingly different. In this fashion, conceptual clarity about the purpose of regulation would help regulators understand the diverse array of financial firms and activities, and apply the suitable regulatory instruments to each situation. 2.2. Adopting a principles-based approach The Commission believes that there is value in harnessing India’s common law tradition, where laws enacted by Parliament work at the level of high principles, and do not embed specific details. These relatively timeless principles are linked to the continuously evolving world of technology, institutional arrangements and financial sector processes through two methods: continuous revision of subordinated legislation that is drafted by the regulator, and interpretation by the judiciary. This approach, which may be termed an Occam’s razor applied to the field of law, has worked well with components of Indian law such as the Evidence Act and the Contract Act, both of which were enacted in 1872, and have largely stood the test of time. In the field of finance, this implies a ‘principles-based’ approach. Laws will articulate broad principles that do not vary with financial or technological innovation. Regulators will write subordinated legislation that could either be in the form of detailed prescriptive rules or be principles-based, depending on the situation and the judgment of the regulator. Subordinated legislation will be frequently modified by regulators, through a process defined by Parliament, and thus constantly adapt to financial and technological innovation. This combination of legislation and subordinated legislation yields a body of law that evolves smoothly over time. For a contrast, if detailed features of financial products FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION 13
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
Page 22 and 23: EXECUTIVE SUMMARY can issue regulat
Page 24 and 25: EXECUTIVE SUMMARY Alongside this, i
Page 26 and 27: EXECUTIVE SUMMARY to analyse one co
Page 28 and 29: Contracts, trading and market abuse
Page 30 and 31: 5. A new Financial Redressal Agency
Page 32 and 33: EXECUTIVE SUMMARY States GDP as of
Page 34 and 35: 1.2. Deliberations in the Commissio
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: CHAPTER 2 The tasks of financial la
Page 47 and 48: THE TASKS OF FINANCIAL LAW ◮ “i
Page 49 and 50: THE TASKS OF FINANCIAL LAW 2.5. Own
Page 51 and 52: THE TASKS OF FINANCIAL LAW desirabl
Page 53 and 54: CHAPTER 3 Structure of the regulato
Page 55 and 56: STRUCTURE OF THE REGULATOR Table of
Page 61 and 62: CHAPTER 4 Functions and powers of t
Page 63 and 64: FUNCTIONS AND POWERS OF THE REGULAT
Page 73: FUNCTIONS AND POWERS OF THE REGULAT
Page 76 and 77: CONSUMER PROTECTION The consumer pr
Page 78 and 79: Table of Recommendations 5.4 Princi
Page 80 and 81: CONSUMER PROTECTION using or disclo
Page 82 and 83: CONSUMER PROTECTION providers. The
Page 84 and 85: CONSUMER PROTECTION Table of Recomm
Page 87 and 88: CHAPTER 6 Micro-prudential regulati
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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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Government of India Volume I: Analysis and Recommendations

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