Opinion Regulating the regulators
Indias commodity futures market is one of the largest in the world
Indias commodity futures market clocked a turnover of Rs 181 lakh crore in 2011-12,making it one of the largest in the world. However,the Cabinet approved the FCRA Bill that seeks to provide more powers to sector regulator Forward Market Commission (FMC) only three days ago. Any financial disturbance in the commodity futures market can impact the financial system but its not part of the Financial Stability and Development Council (FSDC),the apex level body of regulators which are connected with the finance ministry.
The proposals of the Financial Sector Legislative Reforms Commission (FSLRC),created by the government to review and recast the legal and institutional structures of the financial sector,may not have immediately set the cat among the pigeons. It has proposed a Unified Financial Agency by subsuming Sebi,Irda,Forward Market Commission and the PFRDA. It has proposed to retain the RBI but promised to review its regulatory structure. But the parties involved are holding back their guns as the commission is yet to make a formal report.
On the RBI,FSLRC is clear that alongside this independence,an accountability mechanism needs to be set up. The commission wants to review the laws related to monetary policy and draft a monetary policy law emphasising the issues of independence,enumerated objectives,enumerated powers,and accountability mechanisms.
The RBI has been opposing the creation of an independent public debt management agency,another recommendation by the FSLRC. The commission is for carving this function out of the RBI and making it independent. It also mooted that three functions of the RBI be performed by distinct boards which oversee the three areas of work of monetary policy,payments regulation and supervision,and banking regulation and supervision.
There are hints about the need to clip the wings of regulators. It says the fundamentals of public administration suggest that quasi-judicial functions should only be performed by the fiscal authority. The view of FSLRC,headed by Justice BN Srikrishna, is that this could be achieved by placing rule-making functions related to development (for example,regulations for priority sector lending) closer to the fiscal authority,while asking regulatory agencies to verify compliance.
The formation of Unified Financial Agency is likely to be opposed by the FMC which is now functioning under the Ministry of Consumer Affairs,Food and Public Distribution. The RBI has always opposed any changes in its structure though the preamble of the RBI Act,1934,describes the law as a temporary measure. As rightly pointed out by the FSLRC,the piecemeal amendments of regulatory framework have generated unintended outcomes including regulatory gaps,overlaps,inconsistencies and regulatory arbitrage. A stitch in time saves nine.
George is a Senior Editor based in Mumbai
george.mathew@expressindia.com
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