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FSLRC
The Financial Sector Legislative Reforms Commission (FSLRC)
was set-up as the result of a felt need that the legal and
institutional structures of the financial sector in India need to be
reviewed and recast in tune with the contemporary requirements
of the sector. The basic objective was to rewrite and update all
the archaic Indian financial sector laws.
BACKGROUND:
The institutional framework governing the financial sector has
been built up over a century. There are over 60 Acts and multiple
rules and regulations that govern the financial sector. Many of
the financial sector laws date back several decades, when the
financial landscape was very different from that seen today. For
example, the RBI Act and the Insurance Act are of 1934 and
1938 vintage respectively. The Securities Contract Regulation
Act was enacted in 1956, when derivatives and statutory
regulators were unknown. The superstructure of the financial
sector governance regime has been modified in a piecemeal
fashion from time to time, without substantial changes to the
underlying foundations. These piecemeal changes have induced
complex and cumbersome legislation, and raised difficulties in
harmonising contradictory provisions. Such harmonisation is
imperative for effectively regulating a dynamic market in the era
of financial globalization.
TERMS OF REFERENCE:
Review, simplify and rewrite the legislations affecting the
financial markets in India, focussing on broad principles.
Evolve a common set of principles for governance of financial
sector regulatory institutions.
Remove inconsistencies and uncertainties in
legislations/Rules and Regulations.
Make legislations consistent with each other.
Make legislations dynamic to automatically bring them in tune
with the changing financial landscape.
Streamline the regulatory architecture of financial markets.
EIGHT AREAS:
The main work of FSLRC lies in eight areas in which government
agencies will perform complex functions - 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. A
critical pillar of financial law is, thus, the construction of
independent regulators and their functioning.
The first three pillars of the work of FSLRC - consumer
protection, micro-prudential regulation and resolution are tightly
interconnected. All three are motivated by the goal of consumer
protection. Micro-prudential regulation aims to reduce, but not
eliminate, the probability of the failure of financial firms.
The next component of the work of FSLRC lies in capital
controls, i.e. the regulation of cross-border financial flows. All
prosperous countries have negligible capital controls, and India's
peers among developing countries have greater capital account
openness than India. Indian policy makers have repeatedly
stated, in the long run, India will move towards capital account
openness.
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INDEPENDENCE OF THE REGULATOR:
In recent decades, independent regulators have become an
important part of the policy landscape, particularly with 20 years
of development of law, jurisprudence and institutional capacity at
SEBI. FSLRC suggests a need for separating out the
adjudication function from the mainstream activities of a
regulator, so as to achieve a greater separation of powers.
Arguments in favour of independence:
a) The regulator is able to set up a specialised workforce that has
superior technical knowledge.
b) This is assisted by modified human resource and other
processes, when compared with the functioning of mainstream
government departments.
c) With such knowledge, and close observation of the industry,
an independent regulator is able to move rapidly in modifying
regulations, thus giving malleability to laws.
d) The presence of independent regulators improves legal
certainty.
FINANCIAL REGULATORY ARCHITECTURE:
Many alternative structures has been envisioned for the financial
regulatory architecture:
a) SINGLE REGULATOR: All financial regulation can be placed
with one agency. In this case, this one agency will enforce microprudential
and consumer protection law for all financial activities.
b) TWIN PEAKS MODEL: Some countries have constructed two
regulators: one doing micro-prudential regulation and another
doing consumer protection.
At present, Indian law features tight connections between a
particular agency (e.g. SEBI) and the functions that it performs
(e.g. securities regulation). The laws that FSLRC would draft will
not have such integration. There is a role for a Financial
Regulatory Architecture Act which sets out the work allocation
across different agencies. Changes in the work allocation should
not require changes to the underlying laws themselves.
The Commission has proposed the financial regulatory
architecture featuring seven agencies:
Reserve Bank of India: Regulator of Banking & Payments
monetary policy.
Unified Financial Agency: Regulator of financial firms and
activities other than banking and payments.
Resolution Corporation: Deals with closure of distress in
firms.
Financial Redressal Agency: Single window complaint
mechanism against financial institutions and intermediaries.
Financial Stability & Development Council: Recast as
statutory body. Will mange systematic risks and development.
Public Debt Management Agency: Government‟s debt
manager.
Financial Sector Appellate Tribunal: Will hear complaints
against all financial regulators.
Seeking to reform the financial sector regulations, the
commission has proposed a sector-neutral Indian Financial Code
to replace multiple and old financial sector laws, splitting the
regulation between the Reserve Bank of India and a new „Unified
Financial Agency‟ that will oversee the remaining financial
sector. This will limit the role of Reserve Bank to monetary
management. Under the proposed regulatory architecture,
Securities and Exchange Board of India, Forward Markets
Commission (FMC), Insurance Regulatory and Development
Authority (IRDA) and Pension Fund Regulatory and
Development Authority (PFRDA) would be merged into a new
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unified agency.
At a conceptual level, it is proposed that RBI will perform three
functions: monetary policy, regulation and supervision of banking
in enforcing the proposed consumer protection law and the
proposed micro-prudential law, and regulation and supervision of
payment systems in enforcing these two laws. In order to
minimise conflicts of interest across these three fields, and to
develop specialised skills, the Commission recommends that the
three functions be performed by distinct boards which oversee
the three areas of work of monetary policy, payments regulation
and supervision, and banking regulation and supervision.
MAY 2013
The unified financial regulatory agency, which would deal with all
financial firms other than banking and payments, would yield
benefits in terms of economies of scope and scale in the
financial system; it would reduce the identication of the
regulatory agency with one sector; it would help address the
difficulties of lending the appropriate talent in government
agencies. This proposed unified financial regulatory agency
would also take over the work on organised financial trading from
RBI in the areas connected with the Bond-Currency-Derivatives
Nexus, and from FMC for commodity futures, thus giving a
unification of all organised financial trading including equities,
government bonds, currencies, commodity futures, corporate
bonds, etc.
The unification of regulation and supervision of financial firms
such as mutual funds, insurance companies, and a diverse array
of firms which are not banks or payment providers, would yield
consistent treatment in consumer protection and micro-prudential
regulation across all of them.
The present SAT will be subsumed in FSAT, which will hear
appeals against RBI for its regulatory functions, the unified
financial agency, decisions of the Financial Redressal Agency
(FRA) and some elements of the work of the resolution
corporation.
The present DICGC will be subsumed into the Resolution
Corporation which will work across the financial system.
The Financial Redressal Agency (FRA) is a new agency which
will have to be created in implementing this financial regulatory
architecture. It will setup a nationwide machinery to become a
one stop shop where consumers can carry complaints against all
financial firms. An independent debt management office is
envisioned. Finally, the existing FSDC will have modified
functions in the fields of systemic risk and development.
It also recommends empowering the existing Financial Stability
and Development Council, by making it a statutory body
responsible for managing risk and crises in the financial
system. The report also recommends setting up of a financial
data cell, which will look out for systemic risk in the financial
sector, especially the ones arising out of the financial
conglomerates.
It is apparent by the report & recommendations, the overarching
objective of the panel is to create a uniform legal process for
financial-sector regulators, who would all be statutorily
adequately empowered and therefore effectively pursue
protection for the consumer‟s interests.
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RBI TIGHTENS RULES TO CURB GOLD
IMPORTS
With a view to reducing the demand for gold for domestic use, RBI
has proposed to restrict the import of gold on consignment basis
by banks only to meet the genuine needs of exporters of gold
jewellery. As per RBI, the new guidelines would be in line with the
recommendations of a working group on gold that has suggested
aligning gold import regulations with the rest of imports with a view
to reducing gold imports by creating a level playing field between
gold imports and other imports. The RBI also proposes to restrict
the facility of advancing loan against gold coins to a maximum
weight of 50 grams. As per the regulations, banks are currently
permitted to grant advances against gold ornaments and other
jewellery and against specially minted gold coins sold by banks.
However, no advances can be granted by banks for purchase of
gold in any form, including primary gold, gold bullion, gold
jewellery, gold coins, units of gold exchange traded funds and
units of gold mutual funds. While there may not be any objection
to grant of advances against specially minted gold coins sold by
banks, there is a risk that some of these coins would be weighing
much more, thereby circumventing the Reserve Bank’s guidelines
regarding restrictions on grant of advance against gold bullion.
MAY 2013 6
ECONOMIC REVIEW FOR 2012-13
(PMEAC)
Dr. C. Rangarajan, Chairman, Economic Advisory Council to the
Prime Minister has released the document „Review of
the Economy 2012-13.‟ As per the report the improvement in
performance of agriculture and manufacturing sectors is
expected to push the economic growth rate to 6.4 per cent in
2013-14 from 5 per cent in the previous fiscal. The global growth
although projected to pick up in 2013 would continue to remain
at modest levels. In such a scenario India‟s projected growth rate
of 6.4% is relatively high and respectable. The report highlights
that the next decade will be a crucial decade for India. If the
economy grow at 8 to 9 per cent per annum, then the economy
will graduate to the level of a middle income country by 2025.
The report emphasis that it is once again a faster rate of growth
which will enable the country to meet many of the important
socio-economic objectives.
ECONOMY TO GROW AT 6.4% IN 2013-14:
The Report has projected growth rate of 6.4 per cent in the
current fiscal. Economic growth rate had slipped to decade's low
of 5 per cent in 2012-13 mainly on account of the impact of the
global financial woes. The improvement in the growth rate in the
current fiscal would mainly be on account of better performance
of agriculture, industry and services sectors.
AGRICULTURE:
The Advance Estimates of CSO have pegged the growth of
Agriculture at 1.8% in 2012-13. In expectation of normal or
mostly normal monsoon, the farm sector growth is likely to
improve and is projected to grow at 3.5% in 2013-14.
INDUSTRY:
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The Advance Estimates of CSO have pegged the growth of
Industry (including manufacturing, mining and quarrying,
electricity, gas, water supply and construction) at 3.1% in 201213. It is projected to grow at 4.9% in 2013-14. Manufacturing
sector is projected to grow at 4% in 2013-14.
SERVICES:
The Advance Estimates of CSO have pegged the growth of
Services at 6.6% in 2012-13. It is projected to grow at 7.7% in
2013-14.
STRUCTURAL FACTORS:
Investment rate is estimated to be 35.8% of GDP in 2012-13.
There has been a sharp decline in the productivity of capital as
the Incremental Capital Output Ratio (ICOR) has shot up from its
historical level of around 4.0 to much higher levels. The
computed ICOR for 2011-12 and 2012-13 ranges from 5.4 to
11.4, depending on how the ratio is calculated. It appears that
investment capital accumulated in projects is not yielding
commensurate output.
Domestic savings rate is estimated to be around 30.8% of GDP
2012-13. The decline in the domestic savings rate over the past
few years is owing to the increase in the negative savings by the
Government, the decline in profitability of private corporates, and
decline in net financial savings of households.
TRENDS IN CORPORATE FINANCIAL RESULTS:
In 2009-10 and 2010-11 the real net sales growth figures derived
from the corporate data were closer to the ASI numbers than the
IIP. If the corporate numbers are a better guide of manufacturing,
the GDP estimates by CSO for both 2011-12 and 2012-13 could
be revised upwards.
EXTERNAL SECTOR:
Current Account Deficit (CAD): The CAD is estimated to be
$94
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