Yesterday, I laid out the broad contours of the Financial Sector Legislative Reforms Commission (FSLRC) report and what it proposes to do. I argued that this report, if implemented, will provide the new foundations of India’s financial transformation. Of course, in a democracy, no law is going to move forward without adequate debate. The FSLRC report initiates this debate within itself.
There are four notes of dissent in the FSLRC report. Rather than look at them as hurdles, I believe they enhance debate within the Commission and must be taken into account in the wider discussion. This is a good process. Broadly, the dissents are around five issues — authorisation requirements (Jayanth Varma); capital controls: (KJ Udeshi, PJ Nayak and YH Malegam); role of the Ministry of Finance (Nayak); principles-based law (Nayak); and regulation of NBFCs (Malegam). Of them all, I enjoyed Varma’s and Nayak’s notes the most — both are practical, grounded and intelligently argued.
Jayanth Varma expresses concerns about the authorisation requirements for financial service providers. I find his concern worth taking into account. According to him, it the recommendations go through it would mean a ‘risk of regulatory overreach’, as related activities such as those of lawyers, actuaries, academics and other professionals like journalists could attract the registration requirement because they could be construed as a ‘financial service’. He gives an extreme illustration and suggests that even a messenger boy who delivers a mutual fund application would need an authorisation.
PJ Nayak’s dissent is around two points — the centralisation of regulatory powers with the Ministry of Finance, thereby making it a super regulator; and an insightful, practical, ground-up view of the dangers of principles-based regulation in the context of slow courts. Both are worth reading. I see the practical constraints of moving away from rules-based regulations and leaving it for the judiciary to interpret them on a case-by-case basis, each of which could take years, if not decades, to clear. On the former, that is, the issue of giving more regulatory powers to the government, I’m not so sure. The ULIP versus mutual fund regulatory arbitrage war fought between SEBI and IRDA forced the government to come in and support the laxer of the regulators, IRDA. However, IRDA reformed soon after. The overarching approach of the report is to rid the country of sector-wise regulatory approach and replace it with broader principles.
YH Malegam’s dissent stands on two legs — capital controls, and financial regulatory architecture around NBFCs. On capital controls, his view is that the ongoing arrangement, where the government determines the policy for FDI and RBI in consultation with the government makes rules in relation to other capital flows, be continued. As far as regulation of NBFCs goes, Malegam argues that it should remain with RBI.
KJ Udeshi has reservations against recommendations around capital controls that hand over decision making to the government rather than RBI. According to her, the government should make FDI policy on rules, while policymaking to transactions and exchange rate management be left to RBI.
This is a highly-technical subject and overarching report. If you’re still here, I am assuming you’re interested in the subject. Join the debate rightaway.