Government of India Volume I: Analysis and Recommendations

MICRO-PRUDENTIAL REGULATION
Table of Recommendations 6.7 Regulation of governance, management and internal
controls
The regulator will have the following powers in connection with improving governance and management:
1. Regulating norms of corporate governance;
2. Regulating the structure of management incentives;
3. Regulating risk management systems;
4. Regulating internal controls and internal audit;
5. Regulating appointment of qualified auditors and actuaries; and
6. Regulating outsourcing and appointment of agents.
Table of Recommendations 6.8 Monitoring and supervision
The regulator will have the following powers in connection with monitoring and supervision:
1. Mandating disclosures to consumers and the market;
2. Mandating reporting to the regulator;
3. Conducting on-site supervision;
4. Investigating powers; and
5. Developing the capability to conduct analytics on the information received from regulated persons and other
resources.
6.4.5. Monitoring and supervision of regulated persons
These instruments can be used to improve monitoring and supervision by regulators, as
well as, by market participants. The role of monitoring by market participants is complex.
Since monitoring has a public good nature, the Commission proposes an approach
that not only allows regulators to facilitate monitoring by market participants, but also
empowers regulators to fulfil monitoring and supervisory functions on their own.
Monitoring and supervision can take many forms. Monitoring can involve disclosure
of annual statements and other reporting. Regulated persons may also be required to obtain,
maintain and disclose a current credit rating from an approved credit rating agency
(see Table 6.8).
For regulated persons that are under the regulatory purview of more than one regulator,
there should be a requirement for the regulators to co-operate to ensure optimal supervision.
This may entail conglomerate supervision or supervision of a single regulated
person undertaking multiple activities. The Commission does not prescribe any specific
mode of co-operation, and the regulators will be expected to develop co-operation
through mutual understanding and agreement.
6.5. Principles to guide the use of powers
Micro-prudential regulation, like all forms of regulation, imposes costs on the economy.
Regulation is optimal when it achieves a desired objective while imposing the smallest
possible distortion. As such, the draft Code enunciates principles that guide the use of
powers instead of being a simple grant of powers. (see Table 6.9).
Distortions can take various forms. For example, regulations that focus excessively on
products rather than underlying functions could encourage regulatory arbitrage between
various products. Two different products that achieve similar payoffs between risks and
rewards should be regulated in similar ways.
PRINCIPLE 1. Any obligation imposed on regulated persons should be proportionate to-
62 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION