In wide-ranging changes to the way the financial sector functions and is regulated, the government might soon lay out a road map for implementation of certain recommendations made by the Financial Sector Legislative Reforms Commission (FSLRC), including creation of a Unified Financial Agency.
However, many provisions suggested by FSLRC might be watered down, including for matters where appeals can be filed with a unified Financial Sector Appellate Tribunal (FSAT), to avoid any abuse of the new law, according to sources.
FSLRC, chaired by Justice B N Srikrishna, was commissioned by the previous United Progressive Alliance government and has recommended a unified regulator for the financial sector, while creating another layer of oversight in the form of FSAT.
A number of financial sector regulators, including the Reserve Bank of India and the Securities and Exchange Board of India, have opposed various suggestions, but sources said the government could go ahead with many key provisions suggested by FSLRC in due course, after necessary changes.
While the final implementation of various legislative changes suggested by FSLRC might take time as the new government is still studying the wider ramifications, it can show “some kind of commitment” towards the panel’s report during the coming Union Budget presentation this week, a senior government official said.
“The government will come out with something on FSLRC during the Budget. It will show some kind of commitment on this,” he said.
“One aspect is whether to combine various regulators into one common regulator, to be called Unified Financial Authority and it is likely this would happen. But, that will require changing so many laws. It is unlikely that a Bill will be introduced in the Budget session for this. If they want to do it, they can do it in the Winter session. But they will show their commitment that they want to do this.”
Talking about further possible provisions, as per the discussions currently underway on FSRLC, the sources said that the government is also positively considering allowing the power of appeal against this unified regulator. It is being called a ‘super regulator’ by many as it may subsume existing financial sector regulators and its creation would also reduce the powers presently vested with RBI.
“The government is also going to allow power of appeal against UFA as well. Like Sebi has got SAT, the PFRDA Act also has an appellate provision, the IRDA will also have an appellate whenever the amendment takes place in the insurance act. The FSLRC has suggested an FSAT or Financial Services Appellate Tribunal. This will happen,” the official said.
On both these matters, creation of UFA and setting up of FSAT, RBI Governor Raghuram Rajan has come out as being very critical and said last month that some of the recommendations made by FSLRC were ‘somewhat schizophrenic’.
Sources said it was unlikely that the convergence and creation of UFA would get announced in Parliament’s Budget Session, which begins tomorrow, but a commitment will be shown that the government wants to do this.
However, when it comes to the question of appeal, there may be some tweaking in the suggestions made by FSLRC.
Right now, the Sebi Act provides that if an order is passed by Sebi then the concerned party can go to SAT against that order.
While the provision to challenge orders passed by a regulator would remain in place even under the new laws, a dilution may be done in the FSLRC recommendations with regard to appeals against regulations, rules and circulars issued by Sebi, RBI or any other regulator.
The FSLRC suggestions provide for even rules and regulations being allowed to be challenged at FSAT, but that might not be allowed in the final law, as almost all the regulators including RBI and Sebi have opposed this.
In its representation, Sebi is believed to have told the Finance Ministry that the validity of a statute, regulation or a rule can presently be challenged only in the High Court or in the Supreme Court and therefore a remedy was there if somebody is unhappy with a particular rule or regulation.
“If someone feels that a rule is wrong or unconstitutional, there is a mechanism to challenge the same before High Court or Supreme Court. If such appeals are allowed at FSAT, then every offender may start challenging it, and rather than contending that the penalty should be Rs 10 crore or Rs 10 lakh, they may start saying that so-and-so regulation was wrong,” said an official privy to discussions in this regard.
“Such appeals against regulations can be filed even before an order is passed, thus putting the entire regulatory mechanism in a fluid state. Such a scenario will lead to uncertainty and that would result in lack of control over the markets or the financial systems,” he added.
The government was initially inclined to accept the FSLRC suggestions on FSAT and other matters in total, but strong objections raised by regulators and other stakeholders are likely to bring in some dilution.
The FSLRC had submitted its two-volume report to the central government in March last year, wherein it has suggested merger of existing regulators like Sebi, FMC, IRDA and PFRDA into the new UFA, while the SAT (Securities Appellate Tribunal) has been proposed to be subsumed into FSAT.
RBI would continue to exist with modified functions. It has been proposed that the Reserve Bank would perform only three functions — monetary policy, regulation and supervision of banking; and regulation and supervision of payment systems.
UFA would take over from RBI the functions related to financial markets trading in areas linked to bonds, currency and derivatives.