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In new map,all finance regulators sit at FM’s table

As Group of 20 spars over nature of financial sector regulation one year after the Lehman collapse,India’s Finance Ministry has finalised a roadmap for regulatory convergence.

Written by P Vaidyanathan Iyer | New Delhi |
September 15, 2009 9:31:57 am

As the Group of 20 spars over the nature of financial sector regulation one year after the Lehman collapse that triggered a global economic crisis,India’s Finance Ministry has finalised a roadmap for regulatory convergence.

The plan already presented to Finance Minister Pranab Mukherjee last week envisages setting up a Financial Stability and Development Authority (FSDA) with statutory backing and the Finance Minister as its chairperson.

The FSDA will treat all regulators — Sebi,IRDA,PFRDA and the RBI — as equals. It will bite into the RBI’s clout — the RBI Governor today chairs the high-level coordination committee on financial and capital markets (HLCC) — as the first among equals. The HLCC is the only forum for resolving issues that are inter-regulatory in nature.

A Finance Ministry official told The Indian Express that the proposal to set up a FSDA is to facilitate quicker decision-making while regulating financial conglomerates that have interests in multiple domains such as insurance,securities market,pension and banking. For instance,if ICICI is structured as a holding company with subsidiaries handling different businesses such as banking,insurance,securities and pension,then there is no single regulator who has the complete picture. Each of the subsidiaries is governed by respective regulators — the RBI,IRDA,Sebi and PFRDA. Once the FSDA is set up,the holding company will come under its purview.

According to the official,the principal thought behind setting up the Authority with the FM as its head is to ensure the backing of an elected government in rescue operations if and when large financial institutions fail. It was RBI Governor Duvvuri Subbarao himself who had raised the issue of “shared responsibility” when public resources have to be used in bailing out institutions.

In at least two forums — the release of C Rangarajan’s book in New Delhi in August and more recently the Ficci-IBA conference in Mumbai — Subbarao had said if financial stability required using tax-payers money,this function should not be given exclusively to an unelected regulator. “This is the reason why the FM chairs the proposed FSDA,” the official said. The FSDA will have a permanent secretariat in the Finance Ministry,and will replace the HLCC.

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