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Financial sector regulation in India
Susan Thomas Praveen Mohanty
Financial sector regulation in India
1The financial 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, firms, banks, financial 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).
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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 first 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 AppellateTribunal.
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.
Conflict ofinterest: owner of many finance companies.HLCC
Co-ordination between regulators. Members:1. Governor, RBI2. Chairman, SEBI3. Chairman, IRDA4. Finance Secretary, MOF Member secretary: Joint Secretary, capital markets, at MOF.
Problems with the current regulatory structure
Difficulties
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Failure to exploit economies of scale.Example: Commodity futures trading could not take off at NSE/BSE.
Turf conflicts. Inhibits products and markets when they involve multiple regulators.
Conglomerates
SBI, ICICI, HDFC: These may be many distinct firms, but they are really onebig conglomerate. They are virtual firms.
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 efficient way.
2. Be proportionate in imposing burden on industry.
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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 ofimplementation.
HR problems; process problems: these will remainunder any architecture.
Alternatives
1.Integrated regulation
UK, Japan, Korea, etc. have gone this path2. 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.
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Financialsector regulation in India
Susan Thomas Praveen Mohanty
Financialsector regulation in Indiap. 1The financialsector in India
The regulators
RBI, SEBI, FMC,IRDA, PFRDA, MoF, HLCC
The markets
Commodities, equity, debt,foreign exchange
The players
Brokers, firms, banks, financial institutions,foreign
institutional investors, mutualfund managers,
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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.
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Financialsector regulation in India p. 4SEBI
Set up in 1988, as part ofthe SC(R) Act 1956.
The firstregulator 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.
Conflict ofinterest: owner of many finance
companies.
Financialsector regulation in India p. 6HLCC
Co-ordination between regulators.
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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 Indiap. 8Difficulties
Failure to exploit economies ofscale.
Example: Commodity futurestrading could not take
off at NSE/BSE.
Turf conflicts.
Inhibits products and markets when they involve
multiple regulators.
Financialsector regulation in India p. 9Conglomerates
SBI,ICICI, HDFC: These may be many distinct
firms, but they are really one big conglomerate.
They are virtual firms.
Conglomerates are given an edge in the current
regulatory architecture.
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No one regulator knowsthe full picture.
TBTF issues.
Financialsector regulation in India p. 10Goals of regulation
Financialsector regulation in Indiap. 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 Indiap. 13Example: FSAs principlesstatement
1. Using resourcesin the most efficient 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.
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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.
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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
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