Financial sector regulation in India

Susan Thomas Praveen Mohanty Financial sector regulation in India 1The nancial 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, rms, banks, nancial institutions, foreign institutional investors, mutual fund managers, investors, exchanges, depositories, custodians, registrars. RBI Financial sector regulation in India 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).

 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 rst 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 Appellate Tribunal. 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. Conict of interest: owner of many nance companies. HLCC 1. 2. 3. 4. Co-ordination between regulators. Members: Governor, RBI Chairman, SEBI Chairman, IRDA Finance Secretary, MOF Member secretary: Joint Secretary, capital markets, at MOF.

Problems with the current regulatory structure Difculties

 Failure to exploit economies of scale. Example: Commodity futures trading could not take off at NSE/BSE. Turf conicts. Inhibits products and markets when they involve multiple regulators. Conglomerates SBI, ICICI, HDFC: These may be many distinct rms, but they are really one big conglomerate. They are virtual rms. 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 efcient way. 2. Be proportionate in imposing burden on industry.

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 of implementation. HR problems; process problems: these will remain under any architecture. Alternatives 1.Integrated regulation UK, Japan, Korea, etc. have gone this path 2. 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.

Financialsector regulation in India Susan Thomas Praveen Mohanty Financialsector regulation in India p. 1The nancialsector in India The regulators RBI, SEBI, FMC,IRDA, PFRDA, MoF, HLCC The markets Commodities, equity, debt,foreign exchange The players Brokers, rms, banks, nancial institutions,foreign institutional investors, mutualfund managers,

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.

Financialsector regulation in India p. 4SEBI Set up in 1988, as part ofthe SC(R) Act 1956. The rstregulator 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. Conict ofinterest: owner of many nance companies. Financialsector regulation in India p. 6HLCC Co-ordination between regulators.

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 India p. 8Difculties Failure to exploit economies ofscale. Example: Commodity futurestrading could not take off at NSE/BSE. Turf conicts. Inhibits products and markets when they involve multiple regulators. Financialsector regulation in India p. 9Conglomerates SBI,ICICI, HDFC: These may be many distinct rms, but they are really one big conglomerate. They are virtual rms. Conglomerates are given an edge in the current regulatory architecture.

No one regulator knowsthe full picture. TBTF issues. Financialsector regulation in India p. 10Goals of regulation Financialsector regulation in India p. 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 India p. 13Example: FSAs principlesstatement 1. Using resourcesin the most efcient 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.

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.

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