Financial Regulators in Indiaghjk,l

7/28/2019 Financial Regulators in Indiaghjk,l.

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Financial sector regulation in India

Susan Thomas Praveen Mohanty


1The financial sector in India

a. The regulators RBI, SEBI, FMC,IRDA, PFRDA, MOF, HLCC

b. The markets Commodities, equity, debt, foreign exchange

c. The players Brokers, firms, banks, financial institutions, foreign institutional

investors, mutual fund managers, investors, exchanges, depositories, custodians,

registrars.

RBI


Set up RBI under the RBI Act, 1935. Regulator of deposit- taking agencies. Regulator for debt, foreign exchange markets. Securities infrastructure for debt, foreign exchange markets. Payments system. Investment banker for the government. Central bank.

FMC

Flows from the FC(R) Act 1952. Regulator of commodity derivative markets, commodity derivative brokers. FMC regulation is in the form of policy recommendation rather than

implementation (which is done by the DCA) or enforcement/punitive action

(which is done by the police).


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Plays a role in the development of commodity derivative markets. Is an arm of Department of Consumer Affairs.

SEBI

Set up in 1988, as part of the SC(R) Act 1956. The first regulator under the SC(R)A, 1956 was the CCI. Regulator of anything that is exchangetraded. SEBI can set regulatory policy, carry out implementation as well as hasthe

power to enforce regulatory rules and impose punishment on wrong-doing.

Grievances and appeals to SEBI rulings are heard by the Securities AppellateTribunal.

MOF

Plays a role in creating regulators. Prior to the reforms of the nineties, played the role of supervisor of rules

and regulations.

Legislative work. Big picture policy questions that go beyond the agenda of any one

regulator.

Conflict ofinterest: owner of many finance companies.HLCC

Co-ordination between regulators. Members:1. Governor, RBI2. Chairman, SEBI3. Chairman, IRDA4. Finance Secretary, MOF Member secretary: Joint Secretary, capital markets, at MOF.

Problems with the current regulatory structure

Difficulties


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Failure to exploit economies of scale.Example: Commodity futures trading could not take off at NSE/BSE.

Turf conflicts. Inhibits products and markets when they involve multiple regulators.

Conglomerates

SBI, ICICI, HDFC: These may be many distinct firms, but they are really onebig conglomerate. They are virtual firms.

Conglomerates are given an edge in the current regulatory architecture. No one regulator knows the full picture. TBTF issues.

Goals of regulation

De facto principles of regulation

1. Price stability.

2. Protecting the small investor.

3. Preventing market misconduct.

Do these goals lead regulators into the right behavior ?

Good regulation, good market s

The effect of good regulation ought to mean better

market outcomes.

Example: FSAs principles statement

1. Using resources in the most efficient way.

2. Be proportionate in imposing burden on industry.


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3. Facilitate innovation.

4. Think globalisation

5. Do not impede or distort competition.

. 14What can architecture reforms

Achieve ?

It is important to distinguish problems of architecture from problems ofimplementation.

HR problems; process problems: these will remainunder any architecture.

Alternatives

1.Integrated regulation

UK, Japan, Korea, etc. have gone this path2. Rajan & Shah proposal

Create a separate regulator for the 10 large conglomerates. That separate regulator should have one-stop approval power for all

innovations that go beyond one regulator.

3.Incremental work within present system

Take stock of all the regulators, their Legal framework, Incrementally make improvements ,remove decades-old design decisions,

clarify mandate.

This does involve opening up questions about mandate. Need better harmonisation of principles of regulation across the various

regulators.


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Financialsector regulation in India

Susan Thomas Praveen Mohanty

Financialsector regulation in Indiap. 1The financialsector in India

The regulators

RBI, SEBI, FMC,IRDA, PFRDA, MoF, HLCC

The markets

Commodities, equity, debt,foreign exchange

The players

Brokers, firms, banks, financial institutions,foreign

institutional investors, mutualfund managers,


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investors, exchanges, depositories, custodians,

registrars.

Financialsector regulation in India p. 2RBI

Set up underthe RBI Act, 1935.

Regulator of deposit-taking agencies.

Regulatorfor debt,foreign exchange markets.

Securitiesinfrastructure for debt,foreign exchange

markets.

Paymentssystem.

Investment bankerforthe government.

Central bank.

Financialsector regulation in India p. 3FMC

Flowsfrom the FC(R) Act 1952.

Regulator of commodity derivative markets,

commodity derivative brokers.

FMC regulation isin the form of policy

recommendation ratherthan implementation (which

is done by the DCA) or enforcement/punitive action

(which is done by the police).

Plays a role in the development of commodity

derivative markets.

Is an arm of Department ofConsumer Affairs.


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Financialsector regulation in India p. 4SEBI

Set up in 1988, as part ofthe SC(R) Act 1956.

The firstregulator underthe SC(R)A, 1956 wasthe

CCI.

Regulator of anything that is exchangetraded.

SEBI can setregulatory policy, carry out

implementation as well as hasthe powerto enforce

regulatory rules and impose punishment on

wrong-doing.

Grievances and appealsto SEBIrulings are heard by

the Securities Appellate Tribunal.

Financialsector regulation in India p. 5MoF

Plays a role in creating regulators.

Priorto the reforms ofthe nineties, played the role

ofsupervisor ofrules and regulations.

Legislative work.

Big picture policy questionsthat go beyond the

agenda of any one regulator.

Conflict ofinterest: owner of many finance

companies.

Financialsector regulation in India p. 6HLCC

Co-ordination between regulators.


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Members:

Governor, RBI

Chairman, SEBI

Chairman, IRDA

Finance Secretary, MoF

Membersecretary: Joint Secretary, capital markets,

at MoF.

Financialsector regulation in India p. 7Problems with the current regulatory

structure

Financialsector regulation in Indiap. 8Difficulties

Failure to exploit economies ofscale.

Example: Commodity futurestrading could not take

off at NSE/BSE.

Turf conflicts.

Inhibits products and markets when they involve

multiple regulators.

Financialsector regulation in India p. 9Conglomerates

SBI,ICICI, HDFC: These may be many distinct

firms, but they are really one big conglomerate.

They are virtual firms.

Conglomerates are given an edge in the current

regulatory architecture.


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No one regulator knowsthe full picture.

TBTF issues.

Financialsector regulation in India p. 10Goals of regulation

Financialsector regulation in Indiap. 11De facto principles of regulation

1. Price stability.

2. Protecting the small investor.

3. Preventing market misconduct.

Do these goalslead regulatorsinto the right behaviour?

Financialsector regulation in India p. 12Good regulation, good market

outcomes

The effect of good regulation oughtto mean better

market outcomes.

Financialsector regulation in Indiap. 13Example: FSAs principlesstatement

1. Using resourcesin the most efficient way.

2. Be proportionate in imposing burden on industry.

3. Facilitate innovation.

4. Think globalisation.

5. Do not impede or distort competition.

Financialsector regulation in India p. 14What can architecture reforms

achieve?

It isimportant to distinguish problems of

architecture from problems ofimplementation.


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HR problems; process problems: these willremain

under any architecture.

Financialsector regulation in India p. 15Alternatives

Financialsector regulation in India p. 16I.Integrated regulation

UK,Japan, Korea, etc. have gone this path.

Financialsector regulation in India p. 17II. Rajan & Shah proposal

Create a separate regulatorforthe 10 large

conglomerates.

Thatseparate regulatorshould have one-stop

approval powerfor all innovationsthat go beyond

one regulator.

Financialsector regulation in India p. 18III.Incremental work within present

system

Take stock of all the regulators, theirlegal

framework,

Incrementally make improvements,remove

decades-old design decisions, clarify mandate.

This doesinvolve opening up questions about

mandate.

Need better harmonisation of principles of

regulation acrossthe variousregulators.


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Financialsector regulation in India p. 19Take stock of all the regulators,

theirlegal

framework,

Incrementally make improvements,remove

decades-old design decisions, clarify mandate.

This doesinvolve opening up questions about

mandate.

Need better harmonisation of principles of

regulation acrossthe variousregulators.

Financialsector regulation in India p. 19

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Financial Regulators in Indiaghjk,l