New Delhi: India is considering creating a formal structure, even enacting a law that will enable and strengthen coordination between various financial sector regulators such as the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi), according to two officials familiar with the development.
The move is aimed at understanding, regulating and managing financial markets that have increasingly become erratic and complex. The government’s thinking is that a formal body may be able to provide a speedy and coordinated response.
Currently, there is a structure that facilitates this, but it is an informal one—the high-level coordination committee?on?capital markets (HLCC).
Even if HLCC is formalized, the existing regulators will be retained, but a coordination structure will be put in place to strengthen overall supervision of India’s 12 financial entities that operate across the financial markets, each of which has a separate regulator.
To begin with, HLCC in its August meeting asked the finance ministry to collate the recommendations of different committees that have studied the effectiveness of financial sector supervision in India, one of the officials said.
HLCC was set up by the finance ministry in 1992 to bring about better coordination between the financial sector regulators. A non-statutory body, it is made up of the RBI governor, the head of Sebi, the secretary of the department of economic affairs in the finance ministry, the head of the Insurance Regulatory and Development Authority and the head of the Pension Fund Regulatory and Development Authority.
A discussion on the merits of formalizing HLCC’s structure was not part of the August meeting’s agenda, the first official said. However, there was a spontaneous discussion on the impact that gaps between regulators could have on the overall financial stability. The discussion led to a decision to take a closer look at recommendations made by different expert groups on the HLCC structure, the official added.
“Having a committee with statutory basis doesn’t make for any significant improvement. Statutory status brings its own rigidity,” said M. Damodaran, former Sebi chief.
“The answer is to move towards the FSA model at an appropriate time,” Damodaran said. FSA, short for the Financial Services Authority of the UK, is a kind of super regulator for the entire financial sector.
For at least eight years, different committees on financial markets have had something to say on the nature of HLCC.
In the wake of the financial sector crisis in some developed markets, two committees have dealt extensively with HLCC.
A committee headed by the current honorary economic adviser to the Prime Minister, Raghuram Rajan, had in September 2008 recommended that it be given statutory backing. The Rajan committee said it was premature for India to move to the FSA model. HLCC, however, needed a formal structure to plug regulatory gaps and assign responsibility, the panel said.
Earlier, one of the financial sector regulators told Mint the weakness of the current system was that it was up to an individual regulator to inform other members of HLCC about issues in the sector, but likely to have a system-wide impact. HLCC could be rendered ineffective by regulators who want to guard their turf, the official said.
Over the last decade, financial sector liberalization has led to the emergence of conglomerates with a presence across different markets. Therefore, risks carried by these entities in one market could adversely impact units elsewhere. Also, the increased linkage between the Indian financial sector and global markets imply higher cross-border risks.
In March, a committee on financial sector assessment (CFSA) studied the vulnerability of the sector to risks. CFSA’s report said India today has 12 financial conglomerates, without identifying any of them.
A financial conglomerate was defined as a cluster of firms belonging to a group with a significant presence in at least two segments such as banking, insurance and asset management. India’s two largest banks, State Bank of India and ICICI Bank Ltd, would both qualify as conglomerates according to this definition as will the biggest mortgage lender, Housing Development Finance Corp. Ltd.
CFSA was chaired by former RBI deputy governor Rakesh Mohan and comprised officials from the finance ministry. The committee appointed advisory panels—made up of members from outside the government—to come up with suggestions on various issues, including regulation. CFSA disagreed with one of the advisory panel’s recommendation that HLCC’s structure be formalized as it felt the existing “consensus” approach could be more relevant.
Mint had reported on 18 September last year that the finance ministry’s former chief economic adviser Shankar Acharya disagreed with the Rajan committee on formalizing HLCC. “My own view is the current mechanism (HLCC), if worked properly, is adequate,” Acharya had told Mint.
Arguing similarly, Damodaran said, “I think the committee has worked reasonably well.” It could be improved by creating a permanent secretariat, which could be housed in RBI with staff from other regulatory bodies, he added.