GIFT City stokes the debate around a unified financial sector regulator

The arguments for a unified financial sector regulator have always been similar— greater coordination, lesser vulnerability and better regulation


RBI governor Urjit Patel brought up the issue of creating a unified financial sector regulator for the IFSC while speaking at the Vibrant Gujarat event on Wednesday. Photo: Reuters
RBI governor Urjit Patel brought up the issue of creating a unified financial sector regulator for the IFSC while speaking at the Vibrant Gujarat event on Wednesday. Photo: Reuters

Mumbai: With Reserve Bank of India (RBI) governor Urjit Patel having brought up the issue of creating a unified financial sector regulator for the international financial service centre (IFSC), a debate has been stoked once again.

“A unified financial regulatory framework providing for a single regulator for GIFT City could contribute to better regulation and supervision of the financial entities in the City,” Patel said, while speaking at the Vibrant Gujarat event on Wednesday.

At present, the only IFSC in India is at the GIFT City, Gandhinagar.

“While individual regulators can supervise the entities initially when the size of the business is small, a unified regulator would be necessary to pay undivided attention to the IFSC,” Patel added.

The case for a unified financial sector regulator in India has been made multiple times. The arguments have always been similar, those of greater coordination, lesser vulnerability and better regulation of globalised financial conglomerates.

The idea has also been opposed, mostly vocally, by RBI governors in the past. Often these former governors have linked the issue with the RBI’s autonomy and said that the central bank shouldn’t just remain an institution for setting monetary policy rates, but should also have regulatory control over banks.

In a speech he made at New Delhi in May 2001, then RBI governor Y.V. Reddy had brought up the issue of creating an umbrella regulator in response to recommendations made by the advisory group on Securities Market Regulation headed by Depak Parekh. In his speech, Reddy pointed out that rather than worrying about a structure with single or multiple regulators, the government must take charge on important issues such as information sharing and greater coordination between multiple regulators.

As part of its report submitted, the committee on financial sector reforms set up by the Planning Commission of India under Raghuram Rajan in 2007 had suggested setting up a unified regulatory framework.

“Multiplicity of regulators creates severe problems in inter-agency coordination. Experience around the world suggests that this problem is very difficult to solve even with strong structural mechanisms for coordination. In India, these coordination mechanisms are also quite weak,” the report had said.

In 2013, the Financial Sector Legislative Reforms Committee (FSLRC) under Justice B.N. Krishna had gone a step further and suggested that all the regulatory powers of all financial sector regulators, including the RBI, be merged into a single unified financial regulatory agency. The central bank would then be in charge of monetary policy functions only.

In 2014, Rajan himself had called the FSLRC proposal as somewhat “schizophrenic”.

“On the one hand, it (FSLRC recommendations) emphasizes synergies in bringing together some regulators into one entity. But in the process it suggests breaking up other regulators, with attendant loss of synergies. There is no discussion of the empirical magnitude of the synergies gained or synergies lost, which makes the recommendations seem faddish and impressionistic rather than based on deep analysis,” Rajan had said in a speech in Mumbai in June 2014.

Rajan had said that rather than trying to create entirely new regulatory structures, it would be prudent to think of ways to reform the existing structures and make them more efficient.

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