Government of India Volume I: Analysis and Recommendations

CHAPTER 3
Structure of the regulator
Government agencies are required to perform complex functions in eight areas in finance:
consumer protection, micro-prudential regulation, resolution of failing financial firms,
capital controls, systemic risk, development, monetary policy and debt management.
For these functions to be appropriately performed, well structured Government agencies
are required. This is sought to be achieved through a specialised and consolidated set of
provisions on regulatory governance in the draft Code.
The Commission believes that the requirements of independence and accountability
of financial regulators are the same across the financial system and hence it recommends
a unified set of provisions on financial regulatory governance for all areas of finance. The
objective of the proposed Code on regulatory governance is to create a series of obligations
for the Government and for regulators. The Code will cover all functions of the
regulator and lay down the principles and standards of behaviour expected from the regulator.
It will also provide for a system of monitoring the functions of the regulator with a
process to ensure that the regulator is fully transparent and they act in compliance with
the best practices of public administration. Table 3.1 captures the recommendations of
the Commission for the creation of an appropriate regulatory structure.
The Commission recommends that the structure of the regulator be standardised for
all financial regulators. However, there may be exceptions required in respect of certain
specific functions where the general regulatory processes may not apply. These exceptions
to the general process law should be kept to the minimum and generally avoided.
3.1. Selection of the regulator’s board
Regulators in India are statutory entities headed by a board. It is the responsibility of the
Government to appoint the members on the board of the regulator. The Commission
believes that it is necessary to create a statutory system for selecting board members in a
fair and transparent manner. It is recommended that the Government should be aided in
this process by a professional search and selection committee. This will help ensure that
the selected members are competent persons with relevant knowledge and experience.
The Commission looked at various systems of selection committees present under
Indian laws along with the practice in other common law jurisdictions. Based on this
analysis, it recommends that the government should maintain a panel of experts who
will serve as members of the selection committee at all times. Their expertise would be
FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION 21