The quick fix ordinance solution adopted by the finance ministry to resolve the face-off between the stock market and insurance regulators will also empower it to resolve all future regulatory disputes, including those involving the Reserve Bank of India (RBI).
According to the ordinance issued on 18 June, any of the four regulators can make a reference to the joint committee headed by the finance minister, and an order, which will be “binding” on all the regulators, will be issued within three months. The four regulators are RBI, Insurance Regulatory and Development Authority (Irda), Securities and Exchange Board of India (Sebi) and the Pension Fund Regulatory and Development Authority.
So far, following the ordinance, all attention has been focused on how the move hands jurisdiction of unit-linked insurance plans (Ulips), the question of a fight between Sebi and Irda, to the latter.
Two finance ministry officials, who did not want to be named, separately confirmed that the ordinance will cover any dispute between any of the four regulators.
Experts say that the ordinance, which was put together by a small group of officials, will not bring about a big improvement over the prevailing system operated by the non-statutory high-level committee on financial markets (HLCC). Shankar Acharya, who was chief economic adviser in the finance ministry between 1993 and 2000, and a member of HLCC during this period, said: “My own view is the current mechanism (high-level committee), if worked properly, is adequate.”
And one of these experts said that it could even vitiate the regulatory environment.
The ordinance extends the purview of the committee to disputes among the four regulators involving derivatives, money-market instruments and even securities.
“I am disappointed about what it says about lobbying in Indian financial policy,” said Ajay Shah, professor at the National Institute of Public Finance and Policy, a research organization and think tank.
And Acharya pointed out that bailout of financial services firms in the US, such as American International Group Inc., came about following a non-statutory coordination mechanism between different regulators and the US Treasury.
According to Acharya, a semi-formal set-up in the form of HLCC “was pretty effective during most of the ’90s”. The Indian system of multiple regulators, which is similar to the US system, handled the fallout of the Asian financial crisis in 1997 smoothly, he said. “Quality of people and conventions for coordinating are important.”
The ordinance came after the growing rift between Sebi and Irda over the jurisdiction of Ulips, a hybrid instrument entailing equity and insurance components, came to a head on 9 April after the former passed an order against 14 privately held life insurers, saying that they would be required to take a prior approval from it before launching a Ulip scheme. Irda responded by asking the insurers to ignore Sebi’s order. The ordinance nullified Sebi’s order.