This is yet another piece on the 18 June quick-fix dispute resolution ordinance. Why am I writing this? Simply because I haven’t been able to unravel the mystery behind it. The objective is to raise some questions and flag off certain issues. Before doing that, let me look at the context.
The ordinance was the government’s answer to the spat between two regulators—the Securities and Exchange Board of India, or Sebi, and the Insurance Regulatory and Development Authority, or Irda—on which will regulate unit-linked insurance plans, or Ulips. A Ulip is a hybrid product with two components—insurance and investment. Since a substantial portion of the money is invested in equities, the capital market watchdog argued that it had every right to regulate such products, at least partly, but Irda did not agree. According to the insurance regulator, it’s an insurance product and Sebi has no business to interfere in its oversight. The turf war continued for years as both regulators refused to budge. Even the high-level coordination committee on financial markets (HLCCFM), chaired by the Reserve Bank of India governor, could not sort out the differences. The HLCCFM is a nodal forum to discuss regulatory coordination issues.
Also Read Tamal Bandyopadhyay’s earlier columns
In January, the turf war intensified with Sebi issuing show-cause notices to some insurance firms on Ulips. While the firms kept quiet, Irda responded quickly in their defence. At this stage, the government stepped in and meetings were held with both regulators to find a way out, but no solution was reached. At the end of March, Sebi informed the finance ministry about its intention to write to insurance firms directing them to seek the capital market regulator’s approval before launching new Ulips. The ministry kept silent and Sebi went ahead with its plan in early April. This time, too, the insurers stayed quiet and Irda asked Sebi to keep its hands off Ulips. With the two regulators sticking to their guns, the ministry advised them to seek a legal solution that would be binding on both. With public interest litigations being filed in two high courts, in Mumbai and Allahabad, Sebi, without wasting time, moved the Supreme Court in May.
Until this time, there had been no surprise in the sequence of events, but suddenly things took a different turn. As the court was going on vacation, the matter was to come up for hearing in July. On 18 June, the President of India promulgated an ordinance settling the matter in favour of Irda by amending the Insurance Act. The ordinance also amended the Reserve Bank of India Act and set up a statutory joint committee, headed by finance minister, to resolve any disputes among financial sector regulators on hybrid financial instruments that combine features of bonds, equities and insurance.
There’s nothing wrong in the government stepping in and sorting out the issue when the regulators themselves fail to do so. But I have the following questions:
Why didn’t the finance ministry prevent Sebi from issuing directives to the insurance firms in April that escalated the fight? After all, the capital market regulator informed the ministry about this in advance and waited for a week before issuing the directives.
Why did the government first ask Sebi and Irda to seek a legal solution and then change its mind?
Did the government feel that Sebi had a stronger case but it didn’t want the capital market regulator to win the case in a court of law?
Was there pressure from insurance firms and distributors of Ulips that the government could not overcome?
The government might have felt the court would take longer to sort out the issue and, hence, decided to opt for the ordinance route. If indeed this was the case, why was it so wary of consulting the regulators? Neither Sebi nor RBI was consulted on the ordinance.
This is surprising because the government has the power to give directions to any of these regulators on policy issues.
Since the government has the absolute power to overrule any of their policy decisions, there was no necessity to take the ordinance route to resolve the Ulip controversy. I am sure that had the finance ministry told Sebi to keep off Ulips, it would not have questioned the ministry’s decision. And precisely because of the special power that the government enjoys, there is no need to set up a statutory joint committee.
Then how would one sort out regulatory spats? Let’s make it clear first that fights between regulators are rare and even when they take place, in most cases, regulators act with patience and maturity to understand each other and sort them out. Take the case of exchange-traded currency derivatives. Both RBI and Sebi claimed the right to regulate such products initially, but instead of fighting, they constituted a six-member joint committee to find ways to bridge the differences. The understanding was that any issue on which any of the regulators is not comfortable would not be pushed. That arrangement is working fine.
Whenever there is a conflict between two regulators, at the first stage, both of them should try to resolve it between themselves. Sebi and RBI could do that on exchanged-traded currency derivatives, but Irda and Sebi couldn’t on Ulips.
At the second stage, it can be discussed at the institutional forum, the HLCCFM. This committee could not sort out the Ulip issue, but that does not mean we need a statutory panel, headed by the country’s finance minister, particularly when the government has the absolute power to intervene on policy issues.
The lessons of the 2008 global financial crisis are obvious: A central bank, despite being the lender of last resort, cannot have the last word any more as the buck stops with the government, which needs to open its coffers and offer taxpayers’ money to bail out troubled institutions. But that doesn’t justify the constitution of a statutory panel, headed by the finance minister, to interfere with the regulators’ autonomy. Such a committee could be the proverbial thin end of the wedge. It may start as an arbitrator for hybrid products but later may start dictating terms on issues such as which industrial house should get a banking licence or on whom should the capital market regulator go soft in dealing with insider trading charges and so on. That’s the real danger.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai.
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