Government of India Volume I: Analysis and Recommendations

Table of Recommendations 6.4 Regulation of entry
The regulator will have the following powers in connection with restricting entry:
MICRO-PRUDENTIAL REGULATION
1. Notifying pre-conditions for authorisation to carry on regulated activities;
2. Authorising to carry on regulated activities, which may include a process of automatic authorisation; and
3. Approving changes in the controlling interest of regulated persons.
If new firms can be created, existing firms can launch new products or services, and
entirely new business models can come about, the environment will be competitive and
dynamic. The pursuit of these objectives presents two puzzles: the legal framework
should allow only reliable and competent persons to deal with financial consumers, and
lack of existing regulations on a particular area should not hold back the emergence of
new business models.
The Commission, therefore, recommends a balanced approach, which is enshrined
in the draft Code.
1. Requirement for authorisation: Any person who seeks to carry out a financial service
for the first time will need to be authorised by the regulator. This will not apply
to a new product or service launched by existing financial service providers, if
the person is already authorised for that line of business. All new products can be
launched after following the file and use process.
2. Exemption: Representatives of authorised financial service providers need not seek
authorisation for the services for their principal has been given authorisation, as
long as the representative is only carrying out the activity with regards to those services
on behalf of the principal. Through regulations, the regulator will have the
power to exempt, from the authorisation process, certain agencies of the government.
The intent here is to exempt only those agencies that have a unique character,
such as EPFO. This power should only be used as an exception, and does not
mean that other regulations will not apply to an agency exempt from the authorisation
process.
3. Authorisation process: The manner and process of obtaining authorisation for financial
services will vary depending on the type of activity that is proposed to be
carried out. A comprehensive authorisation process will apply to persons who want
to carry out regulated activities which are to be micro-prudentially regulated with
high intensity.
The need to promote innovation in the Indian financial system has been embedded
thus: where a person proposes to carry out a financial service that is not a regulated
activity, a simplified authorisation process will be applicable. Here, the regulator
has the flexibility to specify that the authorisation requirement may be satisfied
through an automatic process.
In either case, whether an activity is regulated or non-regulated, the authorisation
process will not allow the regulator to refuse authorisation merely on grounds that
the regulator does not have in place appropriate regulations to govern the proposed
activity.
6.4.2. Regulation of risk-taking
This category of powers will empower the regulator to prescribe ways in which the regulated
persons can avoid or reduce the risks they take (see Table 6.5). Regulator may
impose restrictions on how the regulated persons invests the funds - their own funds and
those of the consumers. In some cases, they may also impose restrictions on claims that
may be placed from the regulated person’s over business on consumers’ funds. Regulator
may also require adherence to certain business processes that reduce risks to the
60 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION