‘There is need for continuous innovation and strengthening of regulatory and other financial sector governance institutions’https://indianexpress.com/article/opinion/columns/there-is-need-for-continuous-innovation-and-strengthening-of-regulatory-and-other-financial-sector-governance-institutions/

‘There is need for continuous innovation and strengthening of regulatory and other financial sector governance institutions’

Excerpts from a speech by Union Finance Minister P. Chidambaram on the 20th anniversary of the National Stock Exchange in Mumbai,December 14

Excerpts from a speech by Union Finance Minister P. Chidambaram on the 20th anniversary of the National Stock Exchange in Mumbai,December 14

I compliment all those who were behind the idea of National Stock Exchange (NSE) and who nurtured the NSE over the last 20 years.

Recent events have reminded us of the criticality of financial market infrastructure institutions. These include exchanges,clearing houses,depositories,payments infrastructure,etc. These must be seen as extended parts of the regulatory apparatus because they perform a legislative function as they are authorised to write by-laws. They also perform an executive function,such as enforcing the by-laws and detecting violations of regulations. So,while Parliament is the ultimate regulator and Sebi is the regulator of the capital market,I would like to once again emphasise that financial market infrastructure institutions also play a crucial role in regulation and discharging executive functions.

It is,therefore,important that all our institutions maintain the highest ethics and highest standards of probity. An ethics deficit can bring down the entire financial system,as we have seen in the past. Recent incidents have alerted us to this fact and we should never take that chance again. We must demand the highest amount of probity from the managers and owners of financial market infrastructure institutions.


I wish to take this opportunity to recall some of the reform initiatives concerning the capital markets taken recently. We have reduced transaction costs,incentivised listing on SME trading platforms and encouraged Sebi to play an active role in investor protection and awareness. Investment Advisors Regulations have been put in place. We have formulated a national strategy for financial education and repeatedly emphasised the role for foreign investment in the development of Indian markets.

Today,as we look back with pride on our achievements,we also need to look forward and contemplate our future growth agenda.

The capital markets still face various constraints,which need to be addressed urgently and the NSE,with its accumulated wisdom and experience,can help in strengthening the institutional edifice. One important concern is the loss of the onshore market for the rupee and Nifty. The volume of trading of the rupee in NDF [non-deliverable forward markets is said to be a multiple of volumes in official domestic exchanges. Considering the size and linkages that prevail between onshore spot and forward markets and the offshore NDF markets,and the likely challenges to the launch of rupee derivatives on major global exchanges,there is an urgent need to resolve the issues inhibiting the growth of currency derivative markets. We need to accelerate financial sector reforms to address these concerns.

Second,there is an urgent need to increase the competitiveness of Indian financial markets. It was with this objective that a standing council of experts was set up to analyse the international competitiveness of the Indian financial sector,to periodically examine the transaction costs of doing business in the Indian market and to provide inputs to the government for necessary action.

Third,despite our best efforts,bond markets are yet to develop in tune with our aspirations. At every street corner,I am told,there is an NSE brokerage firm where one can buy shares. What puzzles me is,why cannot one buy government or corporate bonds there? How and where have we failed to make use of the same knowledge infrastructure for the development of the bond market? In fact,there is a need to translate the knowledge and institutional capacity from the NSE into an array of markets that can add to the field of organised financial trading in India spanning not just equities,but also corporate bonds,government bonds,currencies,commodities,credit default swaps,interest rate derivatives and currency derivatives.

My fourth concern is increasing retail participation. Going by the data from two leading depositories,namely the NSDL and CDSL,the investor accounts held by them together stand at 21.6 million accounts as on November 30. It is less than 2 per cent of the country’s population. The degree of risk aversion is extremely high among Indian households. It will be a challenge to drive investors away from the “shine of gold” and property and to channel investments into productive sectors of the economy.

My fifth concern is achieving greater financial inclusion and higher financial literacy. One of the major steps needed for the success of the capital markets would be expansion of the investor base. This,in turn,requires a lot of effort in increasing financial literacy and awareness. I think we are not doing enough to introduce courses on finance and capital markets in our higher secondary schools,colleges and non-formal educational institutions.

Last,I wish to make a reference to the recommendations of the FSLRC [Financial Sector Legislative Reforms Commission. The FSLRC recommendations constitute the most important set of recommendations that the government of the country has received in the last decade. Globalisation has ushered in an era of intense competition and,as such,there is need for continuous innovation and strengthening of regulatory and other financial sector governance institutions. This was clearly demonstrated by the recent global financial crisis. We attach great value to the recommendations of the FSLRC. However,I acknowledge that passing legislation in terms of the recommendations of the FSLRC will take time. Legislation and law-making in India is a complex process and,like in every other country,it will take time. Therefore,we have decided that while we actively pursue making laws,we will make a beginning by implementing the non-legislative recommendations of the commission so that India’s financial sector stands on sound legal foundations and remains well regulated,efficient and internationally competitive. A consultation-cum-taskforce-based approach is being adopted to pursue the recommendations. I invite all of you to play a pivotal role,and to work with the government in implementing the non-legislative recommendations and ensuring the drafting and passage of the legislation.